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Edited version of your private ruling
Authorisation Number: 1012527087769
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 2012-13 financial year?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
You acquired and commenced operating a business during the relevant financial year.
You meet the assessable income test, however the business did not make a tax profit in the relevant financial year.
You have advised that the loss was due to the amount of depreciation claimed in the relevant year using the small business entity rules (including the instant asset write off for assets less than $6,500).
You anticipate the business will make a profit in the subsequent financial year.
Your income for non-commercial loss purposes was more than $250,000 in the relevant financial year as a result of you receiving a once off lump sum payment.
You expect your income from other sources to be nil in future 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)
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.
A taxpayer will satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if their income for non-commercial loss purposes is less than $250,000.
In your case, you do not satisfy the income requirement for the relevant financial year 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 a 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.
It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. In your case, you have received a lump sum payment. Receiving this payment did not affect your business; 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.
Additionally, the fact that a high level of deductions under the small business entity depreciation rules contributed to your business' loss is not considered to be 'special circumstances'. Depreciation expenses are considered to be incurred in the normal course of business.
Accordingly, the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business in the calculation of your taxable income for the relevant financial year.
While we appreciate your situation, there is no other 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.