Edited version of your private ruling

Authorisation Number: 1012485199859

Ruling

Subject: Non-commercial losses

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 business in the calculation of your taxable income for the relevant 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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling dated, and

· the documents provided with the application for private ruling.

You operated a business in partnership with your ex-spouse for more than 20 years.

You and your ex-spouse separated in the 200X financial year.

You and your ex-spouse owned several properties at the time of separation.

Family Court proceedings were initiated shortly after separation.

The proceedings extended over several years and to date have not been fully resolved.

The division of the asset pool was uncertain and you decided to establish your own business.

You now operate a business as a sole trader.

You commenced operations in the 20YY financial year.

An interim family court order required that the stock owned by the partnership be sold and the profits divided between you and your ex-spouse.

Due to the quality and quantity of stock sold, your taxable share of the partnership profits for the relevant financial year is substantial.

The final sale of stock occurred in July of the relevant year and the partnership was then dissolved.

It is estimated that the partnership profits for the subsequent financial year will again be substantial.

Due to the interim family court order that required the stock to be sold, your share of the partnership income has put you above the $250,000 threshold for NCL purposes in the relevant financial years.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1,

Income Tax Assessment Act 1997 - Section 35-55,

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a),

Income Tax Assessment Act 1997 - Subsection 35-10(2) and

Income Tax Assessment Act 1997 - Subsection 35-10(2E).

Reasons for decision

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise his discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement for the 2011-12 or 2012-13 financial years as your income for non-commercial loss purposes was above $250,000.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's 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. 

In this case, an interim family court required that the stock owned by the partnership be sold. The profits were then divided between you and your ex-spouse. Receiving these profits did not affect your operations as a sole trader; instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

While we appreciate your situation, there is no discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.