Edited version of your written advice

Authorisation Number: 1012693316255

Ruling

Subject: Non-commercial losses

Question

Will the Commissioner exercise his discretion 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

You commenced a business during the 2013-14 income year.

The business activity resulted in a loss in the 2013-14 financial year.

The business activity did not meet any of the four non-commercial losses business tests.

Your income for non-commercial loss purposes is less than $250,000.

You expect that the business activities will produce a profit in the 2014-15 financial year.

Relevant legislative provisions

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)

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

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.

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 satisfy the income requirement for the 2013-14 financial year, but your business does not meet any of the business tests.

If you meet the income requirement but your business doesn't pass any of the four business tests, you for the Commissioner's discretion to allow you to offset your loss if:

• your business would have passed one of the tests except for special circumstances outside your control, or

• you have just started your business and, because of its nature, there is a lead time before

• it passes one of the tests, or

• you can expect a profit.

Special circumstances

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.

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 your case, it is not accepted that your circumstances constitute special circumstances in the way this term is used in the legislation. We consider the decision to commence the business activity part way through the income year is not a factor that was outside of your control. Accordingly, the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

Lead time

In order to exercise the discretion contained in paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that:

• it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests; and

• there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry.

For the Commissioner to exercise this discretion you must be able to show that the reason your business activity has not met one of the tests is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to meet a test is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

We do not consider that there are factors inherent to the nature of your business that would cause you to make a loss. We consider that the reason your business failed to meet a test is peculiar to your situation, due, in part, to the timing and the scale on which the business activity commenced and the need to build up a client base.

Accordingly, the Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.

Conclusion

As the Commissioner will not exercise the discretions under paragraph 35-55(1)(a) or paragraph 35-55(1)(b) of the ITAA 1997 the losses from your business activity cannot be used in the calculation of your taxable income for the 2013-14 financial year; they must be deferred until your business activity produces a profit, or you meet the income requirement and one of the four business tests.