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Edited version of your written advice
Authorisation Number: 1012729709580
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 2013-14 financial year?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You operate a business.
Your business generated a tax loss in the 2013-14 financial year.
You received a one-off payment during the 2013-14 financial year.
As a result of this payment, your income for non-commercial loss purposes in the 2013-14 financial year was more than $250,000.
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 2013-14 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.
In your case, you have received a one-off 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.
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 2013-14 financial year.