Edited version of your written advice

Authorisation Number: 1012965077681

Date of advice: 11 February 2016

Ruling

Subject: Commissioners discretion in relation to special circumstances

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 activity in the calculation of your taxable income for the relevant financial years?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

You operated a business.

Your business commenced many years ago.

You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You were operating the business until a natural disaster destroyed the vast majority of the assets used in your business.

It took a number of years and a significant amount of expenditure to re-establish the infrastructure of the business.

The business was sold as a going concern in 20XX mainly due to the difficulty in re-establishing the business after the natural disaster.

The business made losses in the relevant financial years.

The business made a taxable profit in 3 of the 4 years prior to the natural disaster.

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 years 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 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 years 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.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that:

• but for the special circumstances, you would have made a tax profit; and

• you have met one of the four tests or would have but for special circumstances.

Consequently the Commissioner will exercise his discretion in the relevant financial years.

Further issues for you to consider

It is important to distinguish between the deferred non-commercial loss under Division 35 of the ITAA 1997 and a carry forward loss under Division 36 of the ITAA 1997. A carry forward loss can be offset against income from any source in future years and deducted regardless of whether the activity is carried on or not. A deferred loss remains attributable to the activity that generated it. A deferred loss can only be offset against income from that activity if the activity qualifies for the exception, an objective test is passed, or the discretion is exercised. It is only deductible if the activity is carried on; if the activity permanently ceases the deferred loss can never be offset.

As the Commissioner has exercised his discretion, the losses from your business are not deferred non-commercial losses, they are carry forward losses. Therefore those losses can be offset against income from any source in future years and deducted regardless of whether the activity is carried on or not.