Edited version of private advice

Authorisation Number: 1051774104267

Date of advice: 29 October 2020

Ruling

Subject: Commissioner's discretion - non-commercial losses

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

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were made redundant by your previous employer XX, on XX/month/20XX.

Partially due to the employment termination payment from XX, your income for non-commercial loss income test purpose exceeded $XXX.

You started a sole trader business as a XX.

You claimed that the commencement date of the business is XX/month/20XX.

You had to buy your own equipment and vehicle to start the business.

You had business income of $XX and deductions of $XX during this income year.

Within the deductions, you claimed $ XX 'instant asset write-off'. This contributed to a significant proportion of your business losses.

You expect the business will make a tax profit in the 20XX income 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)

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

Reasons for decision

Division 35 of the Income Tax Assessment Act 1997 (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

·         the Commissioner exercises his discretion.

For this division to apply, you must be carrying on a business.

In your case, you have indicated in your application that your activity commenced on XX February 20XX. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business during the 20XX income year.

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, the employment termination payment partially caused you not to satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. However, receiving this payment is not considered as special circumstances for the Commissioner to exercise his discretion.

On the other hand, you chose to apply the 'instant asset write-off' concession which is a concession available to eligible businesses so they can claim a full tax deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use. The Commissioner's view is that this concession does not constitute special circumstances as outlined in TR 2007/6.

There is therefore no evidence to suggest that the reason for the loss was as a result of any 'special' circumstances outside of your control.

In relation to the 'business nature', you stated that businesses of this type are able to make a tax profit from the start of operation. The Commissioner thus does not believe that anything inherent in the nature of your business activity has prevented you from being able to produce a tax profit in the 20XX income year.

As a result, 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 for this income year.