Edited version of your written advice

Authorisation Number: 1012816843915

Ruling

Subject: Non-commercial losses - Commissioner's discretion - special circumstances

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 20YY/ZZ financial year?

Answer:

No

This ruling applies for the following period

Year ended 30 June 20ZZ

The scheme commenced on

1 July 20XX

Relevant facts

You carry on a business which made a loss in the financial year under consideration.

Your business has been affected by a flood in an earlier year.

You have provided a business worksheet showing income and expenses and highlighted expenses related to the effect of floods.

Figures from your previous income tax returns have been considered to determine the overall profitability.

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 due to substantially higher income from extra work taken on during this year.

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, or

• 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 relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

• your business activity would have made a tax profit

• the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

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. 

Income requirement test

In your case, you received substantially higher income by taking extra work in this financial year to assist in completing the necessary repair work from the floods. Receiving these payments did not affect your primary production enterprise, causing it to make a loss. 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.

Non profitability due to floods

It is accepted in your case that the flood may constitute special circumstances in terms of your primary production activity and may impact on your primary production business for a number of years. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made.

The following considerations lead us to believe that had the special circumstances not occurred the business still would have returned a loss:

A review of your income tax returns from the 20XX year the time of commencement of this business activity, through until the 20YY income year indicate that a profit has never been made. Your average annual expenses have exceeded your average annual income by an amount of approximately $20,000 each year. There appears to be an imbalance between income and expenses.

In the Business Worksheet you provided for the 20YY/ZZ income year you have highlighted the extra expenses relating to the impacts of the floods, but after taking out these expenses and allowing you your highest annual income previously achieved there still would have been a loss of about the average amount.

Based on the evidence available, we are not satisfied that you would have made a profit but for the special circumstances in the 20YY/ZZ income year.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.

While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.