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Edited version of your private ruling
Authorisation Number: 1012472595916
Ruling
Subject: Non-commercial losses - Commissioner's discretion
Question
Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2011-12 and the 2012-13 financial years?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ending 30 June 2013
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You do not satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.
You carry on a business and you employ a number of staff.
You have decided the 20XX-YY and 20YY-ZZ financial years will be years of repair, restructure in preparation for major growth.
You pass the assessable income test, the real property test and the other assets test.
You intend to return a tax profit in the next financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 35-10(1)
Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Income Tax Assessment Act 1997 paragraph 35-55(1)(a)
Reasons for decision
For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:
· you satisfy the income requirement and you pass one of the four tests
· the exceptions apply, or
· the Commissioner exercises his discretion.
In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.
The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control.
'Special circumstances' are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity, including drought, flood, bushfire or some other natural disaster.
For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:
· your business activity would have made a tax profit
· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.
Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:
Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity.
Your activities show losses in the 2011-12 and the 2012-13 financial years as you have decided to carry out major restructure, repairs and maintenance.
It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these activities to be the normal operating procedures of carrying out a business in your industry and not unusual or out of the ordinary.
Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.