Edited version of private advice

Authorisation Number: 1012627236420

Ruling

Subject: Commissioner's special circumstances discretion for non-commercial business 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 activity in your calculation of taxable income for the years ended 30 June 2012 and 2013?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 October 2000

Relevant facts

You have conducted a business activity for a number of years.

A key person in the business suffered an injury that prevented them from completing work essential to your business. You attempted to complete this work and suffered an injury yourself that prevented you from doing this work. The injuries had an enduring effect.

These injuries to key staff impacted on your business with increased expenses, reduced performance and on occasions it was halted. You maintained assets and equipment so that you could resume full operations as soon as possible.

Your assessable income in previous five years exceeded $20,000.

Your other income is less than $250,000.

Relevant legislative provisions

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

Reasons for decision

Summary

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years ended 30 June 2012 and 2013 on the basis that it is accepted that the loss of key staff is special circumstances in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997 and these circumstances prevented you from passing the assessable income test in these years.

Detailed reasoning

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 and you pass one of the four tests

• the exceptions apply, or

• the Commissioner exercises his discretion.

In your situation, you satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, is less $250,000). You do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless you pass one of the tests or the Commissioner exercises his discretion.

You are unable to pass any of the tests in these years. The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

For individuals who satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to not pass a test. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances the activity would have passed one of the four tests.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that but for the special circumstances,( based on the previous history of income) you would have passed the assessable income test.

Consequently the Commissioner will exercise his discretion in the years ended 30 June 2012 and 2013.