Edited version of private advice

Authorisation Number: 1051589361103

Date of advice: 3 October 2019

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 20XX-XX financial year?

Answer

No

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your income for non-commercial loss purposes for the 20XX-XX financial year is over $250,000.

You have been in the business since 200X.

You are carrying on a business (the business).

The 20XX-XX financial year was the first year it made a loss in its operation.

The loss was due to the fact you were going through some personal circumstances and no longer worked in the business yourself.

The business was sold due to these personal circumstances. A move in premises during the year also occurred affecting sales resulting in an overall trading loss in 20XX.

Given the business was sold during the year, there will be no ability for you to carry forward the loss as you no longer have this business.

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, 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.

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.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the 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, you have losses in relation to your business activities in the 20XX-XX financial year. This business activity has now ceased and the company has been sold.

The circumstances you describe are unique to you and are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Therefore, the Commissioner is unable to exercise the discretion available to allow you to include these losses in the calculation of your taxable income.

Deferred losses where a business has ceased

Taxation Ruling TR 2001/14 discusses the issue of deferred losses when a business activity ceases to be carried on. It states, at paragraph 55:

In some cases an individual taxpayer's circumstances may change leaving issues about their ability to deduct the full extent of any loss made. Any amount deferred under subsection 35-10(2) will only be deductible in a subsequent year if the business activity that gave rise to this amount, or one 'of a similar kind', is carried on in that subsequent year. If the activity, or one 'of a similar kind', is never carried on again, the entitlement to deduct the amount will be lost.

In your case, the business activity that gave rise to your loss has now ceased. As the loss will be deferred, if this business activity, or one of a similar kind, is never carried on again, you will be unable to claim the losses in the future and they will be lost.

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.