Edited version of your written advice

Authorisation Number: 1012847150014

Date of advice: 24 July 2015

Ruling

Subject: The Commissioner's discretion and non-commercial business 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 activity in your calculation of taxable income for the relevant financial year?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

During the relevant financial year you undertook an activity to hold an event.

You submit that you were affected by circumstances in the relevant financial year which caused the event to be cancelled, and fail to make a profit or pass one of the four tests. The relevant circumstances were:

• you could not sell a sufficient number of tickets to execute the event

• your target market consisted of a significant number of university students, however because of university exams many confirmed tickets were cancelled, and

• conflicting events were planned to be held in that weekend which affected ticket sales.

You are planning to hold a similar event in a later year.

You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) 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 subsection 35-10(2E), and

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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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.

'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, including drought, flood, bushfire or some other natural disaster.

For individuals who satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have:

• made a tax profit or

• 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. 

Outside the control of the operators of the business activity

TR 2007/6 also discusses what is considered 'Outside the control of the operators of the business activity'. The following has been extracted from paragraphs 55 to 58 of this ruling:

The concept of 'control' was discussed in Secretary, Department of Employment, Education and Youth Affairs v. Ferguson (1997) 76 FCR 426; (1997) 48 ALD 593; (1997) 147 ALR 295 for the purposes of subsection 45(6) of the Employment Services Act 1994 . At 76 FCR 438; 48 ALD 603; 147 ALR 306, Mansfield J said: 

The expression in s45(6)(a) requires that the main reason for the failure was something that the person had within that person's control. The concept of 'control' in that context is one of fact, but I think it is intended to mean something which the person could have done something about.

And at 76 FCR 438, 48 ALD 603; 147 ALR 306:

It recognises the focus of the expression upon occurrences which the person concerned could not realistically prevent.

In application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the relevant financial year.

You submit that the following circumstances impacted on the ability of your activity to make a tax profit or passed one of the four tests:

• you could not sell a sufficient number of tickets to execute the event

• your target market consisted of a significant number of university students, however because of university exams many confirmed tickets were cancelled, and

• conflicting events were planned to be held in that weekend which affected ticket sales.

The question that must be addressed is whether the situations described above are considered special circumstances.

It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary. Further they are not considered to be out of your control.

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