Edited version of private advice

Authorisation Number: 1051695484984

Date of advice: 23 June 2020

Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question

Will the Commissioner exercise his discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the year ended 30 June 20XX?

Answer

No, there is no discretion available to the Commissioner.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1/07/20XX

Relevant facts and circumstances

You carry on a business as a sole trader.

You reached a settlement with an insurance company to pay out the remainder of an income protection policy. Remaining on the policy was negatively impacting your mental health.

The settlement amount caused you to not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997.

Your former accountant advised you to utilise some of the settlement funds to purchase equipment and set up a home office for your business so you could work from home rather than commute each day.

You made a loss from your business.

You were unaware, and not advised by your former accountant, of the non-commercial loss rules which would prevent you from deducting the losses from your business activity against your other income.

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)

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision

Division 35 of the ITAA 1997 applies to defer losses from a business activity unless:

·         you satisfy the income requirement and pass one of the four tests

·         one of 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.

It is only in certain circumstances that the Commissioner has discretion to determine that it would be unreasonable for the loss deferral rule to apply. For individuals who do not satisfy the income requirement, this is where:

·         there are 'special circumstances outside the control of the business activity' which have either:

-        materially affected the business activity and prevented it from making a tax profit, or

-        extended the time within which, objectively, the business activity can be expected to make a tax profit, or

·         'because of its nature', the business activity has not, or will not produce a tax profit, and there is an objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will produce a tax profit.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides guidelines on how the discretion may be exercised. Special circumstances outside the control of the business activity include drought, flood, bushfire or some other natural disaster, such as a cyclone, hailstorm or tsunami. Circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. The special circumstances must have affected the business activity.

The phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to make a tax profit. The discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. The discretion is not intended to be available where the failure to make a tax profit is for other reasons.

In your case, you received a one-off payment that caused you to fail the income requirement in subsection 35-10(2E) of the ITAA 1997. Receiving this payment did not affect your business, causing it to make a loss. There is no evidence to suggest that the reason for the loss from your activity was as a result of any special circumstances outside of your control. Also, your reason for not being able to produce a tax profit is not due to any inherent characteristics of businesses in your industry. Businesses of this type are able to make a tax profit in the first year of operation.

There is no discretion available to the Commissioner to determine that you satisfy the income requirement where you do not, including where you receive a one-off lump sum payment. As such, the Commissioner is unable to exercise his discretion to allow you to include any losses from your business activity in the calculation of your taxable income.