Edited version of your written advice

Authorisation Number: 1051423903656

Date of advice: 1 September 2018

Ruling

Subject: Non-commercial losses and the Commissioner’s discretion for 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 your calculation of taxable income for the 2016-17 and 2017-18 financial years?

Answer

No

This ruling applies for the following period:

1 July 201X to 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a business.

You commenced business operations on DDMMYY.

In 200X you suffered an injury.

You submit that you were affected by special circumstances in the 201X-1X and 201X-1X financial years.

You have submitted evidence to substantiate your claim:

You submit that the special circumstances impacted on the profitability of your business in the following ways:

● You are incapable of being able to work for extended periods of time during the year

● This has limited your time available to spend working in the business throughout the 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 200X-1X 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 financial year(s) 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, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the financial year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests.

Taxation Ruling TR 2007/6 provides guidelines in relation to non-commercial business losses and the Commissioner’s discretion. Paragraph 13 of TR 2007/6 states that 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. Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35 of the ITAA 1997.

Paragraph 15 of TR 2007/6 states that the discretion can be exercised in income years after the one in which the special circumstances occurred if the effects of those special circumstances continue to prevent the business activity from satisfying any of the tests in those later income years. However, there may be situations where the special circumstances, because of their continued existence, become the ordinary or usual situation. It would not be appropriate to exercise the discretion once this occurs.

In your private ruling application you provided evidence which shows that you have suffered from a medically diagnosed condition since 200X. Your business was established in the 201X-1X financial year, while the condition was already in existence. When the circumstances become the ordinary or usual situation, or the circumstance was in existence prior to a business commencing, the discretion cannot be exercised.

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