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Edited version of your written advice
Authorisation Number: 1012753937370
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Ruling
Subject: Non-commercial loss and the Commissioner's discretion
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 (business A) in the calculation of your taxable income for the 2013-14 financial year?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2014
The scheme commences on:
1 July 19XX
Relevant facts and circumstances
You operate business A as a sole trader at multiple locations and employ a number of fulltime staff.
A separate legal entity operates business B at the same premises as business A.
Business B owns the equipment used by business A, does the appointment bookings, leases the premises, and pays the outgoings such as the utilities and telephone.
As fees in the industry of Business A are bulk billed, they are not enough to cover the salary of a qualified professional. As a result business A operates at a loss.
Business B is highly profitable and as a result you derive a large salary from it.
The activity had assessable income of more than $20,000 for the 2013-14 financial year.
The activity has been a continuous operation for a number of years.
Your income for non-commercial loss purposes in the 2013-14 financial year was above $250,000.
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 subsection 35-10(2E)
Income Tax Assessment Act 1997 paragraph 35-55(1)(a)
Reasons for decision
For the 2009-10 and later financial 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
• the Commissioner exercises his discretion.
In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.
The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the 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, the losses incurred in your sole trader business activity (Business A) are as a consequence of your business structure rather than any special circumstance outside your control. Additionally having over $250,000 in assessable income being distributed from the trust (Business B) did not affect Business A causing it to make a loss; rather 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 these purposes. Accordingly the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997.