Edited version of private advice

Authorisation Number: 1012622602099

Ruling

Subject: Non-commercial losses - one off lump sum payment - income more than $250,000

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 losses from your business activity in the calculation of your taxable income for the year ended 30 June 2013?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You resigned from your employment and received a one off lump sum payment.

As a result of the lump sum payment your income for non-commercial loss purposes was more than $250,000.

Your business activity produced a loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 section 35-1

Income Tax Assessment Act 1997 subsection 35-10(2)

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

Income Tax Assessment Act 1997 section 35-55

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

Reasons for decision

For the 2009-10 and later income 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 in subsection 35-10(2E) of the ITAA 1997 and you pass one of the four tests

• one of the exceptions applies, or

• the Commissioner exercises his discretion.

You satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 if the sum of your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses is less than $250,000.

In your situation, you did not satisfy the income requirement and you did not come under any of the exceptions. Your business losses are therefore subject to the deferral rule in Division 35 of the ITAA 1997 unless the Commissioner exercises his discretion.

The Commissioner may exercise his discretion where a business activity is affected by special circumstances outside the control of the operators of that business activity (paragraph 35-55(1)(a) of the ITAA 1997). 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 individuals who do not satisfy the income requirement, the business activity must have been materially affected by special circumstances, causing it to make a loss. In this context, the Commissioner may exercise his discretion where, but for the special circumstances:

• the business activity would have made a tax profit, and

• 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 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) provides guidelines on how the discretion in paragraph 35-55(1)(a) may be exercised.

Special circumstances outside the control of the operators of a business activity include drought, flood, bushfire or some other natural disaster (paragraph 35-55(1)(a) of the ITAA 1997). Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph (paragraph 53 of TR 2007/6).

The use of the word 'including' in paragraph 35-55(1)(a) of the ITAA 1997 indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question (paragraph 53 of TR 2007/6).

The special circumstances must have affected the business activity (paragraph 49 of TR 2007/6). 

In your case, you received a one off lump sum payment when you resigned from your employment. Receiving this payment did not affect your business activity, causing it to make a loss; rather, receipt of the payment caused you to fail the income requirement in subsection 35-10(2E) of the ITAA 1997.

As there is no evidence of the existence of any special circumstances that affected your business activity causing it to make a loss, or to not satisfy one of the four tests, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997.

While we appreciate your situation, there is no discretion available to the Commissioner that would allow you to claim the losses from your business activity in the circumstances you describe.

While you are unable to claim your loss in the year ended 30 June 2013, the loss is simply deferred to a future income year when the requirements of Division 35 of the ITAA 1997 are satisfied.