Edited version of private advice

Authorisation Number: 1012683199975

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 activity in the calculation of your taxable income for the 2013-14 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

Your business activity commenced on dd/mm/yyyy and an economic downturn has had a significant impact on your business returning losses each year including the 2013-14 financial year.

You meet the income requirement of Division 35 of the ITAA 1997.

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 paragraph 35-55(1)(a)

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

Reasons for decision

In your application you referred to Federal Commissioner of Taxation v Eskandari 2004 ATC 4042 (Eskandari) paragraph:

(16) The Explanatory Memorandum and second reading speech ...

"There is also a discretion to allow the losses where the business is affected by special circumstances, such as natural disaster, or is in its start-up phase".

The reference of special circumstances, such as natural disaster, or is in its start-up phase in Eskandari is explained in the Explanatory Memorandum of Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 (EM) at the following paragraphs;

2.6  If a business activity does not pass any of these tests, the Commissioner has a discretion to nonetheless allow a taxpayer to offset the losses against other income, having regard to certain circumstances.  For example, if there are exceptional circumstances applicable to the business activity that stop it from meeting one of the four tests.  Exceptional circumstances could include adverse weather conditions, such as drought or flood, that prevent a farming business from meeting the assessable income test in a particular year.

2.25…For taxpayers with an adjusted taxable income less than $250,000, they must demonstrate that, because of its nature, the business activity does not meet any of the four of the objective tests.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course…

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) states at paragraph 47:

ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

In Scimitar Systems Pty Ltd v. DFC of T (2004) 56 ATR 1162; [2004] AATA 720 (Scimitar), the AAT decided that the prevailing economic conditions pertaining to the IT industry did not constitute 'unusual circumstances' applying to the taxpayer in the relevant year of income. The Commissioner did not find in favour of the taxpayer where an economic downturn in the industry was the reason the taxpayer failed to meet a specific test in relation to personal services income.

Paragraph 47 of TR 2007/6 states:

In the context of Division 35, where the income requirement is satisfied, special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply.^8A Subject to paragraphs 48 and 53 of this Ruling, ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry…

You advise your activities have been affected by the economic downturn. Whilst we accept that the downturn was not within your control, we consider the fluctuations to be a normal part of operating a small business.

In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the 2013-14 financial year.