Edited version of private advice

Authorisation Number: 1051896702314

Date of advice: 9 September 2021

Ruling

Subject: Non-commercial business losses

Question 1

Can your lump sum payment be excluded when determining if the income requirement contained in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) has been satisfied?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business in the calculation of your taxable income for the 20XX-XX income year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Entity A and entity B (you) are primary producers. You commenced your business activities on xxxx.

The costs of establishing the business were rather substantial. In addition to the start-up expenditure required, there are the ordinary ongoing costs including repairs and maintenance, accounting and advisory fees and wages. These outgoings are significant contributing factors as to why the business is not yet turning a profit.

You run the business with the assistance of a casual worker in the xxxx, xxxx and xxxx income years.

You were previously employed and due to the COVID-19 pandemic you were made redundant in xxxx. You both received a redundancy payment which resulted in your taxable income being greater than $XXX.

You were offered the option to defer your redundancy payment until the 20XX-XX income year but declined this opportunity due to uncertainty of the financial position of the company and their ability to make a future payment. You also needed this payment to cover your ongoing costs of living and mortgage commitments.

You were not aware of the $250,000 income requirements. If you had been aware of this income requirements, you would have taken the deferment and opted for the redundancy amount to be paid in the 20XX-XX income year.

Since the COVID pandemic, you have increased your involvement in the operations of the partnership.

Entity B has secured full time work through the pandemic, however this is a fixed term contract and pays only around half the amount of the previous salary. It also required a far higher time commitment than the previous job, which reduces availability to assist in the partnership business.

Your income for non-commercial loss purposes is more than $XXX for the 20XX-XX income year. You meet the assessable income test for the 20XX-XX income year.

Your business goal was outlined. To achieve the goal requires more expenditure.

You are close to achieving the goal, however you still have to do more work.

Recently the business achieved top price at the market for some products.

You believe that through maintaining a high quality and attracting premium prices that the partnership aims to turn a profit prior to the xxxx income year. However, due to COVID, a profit is not anticipated until the xxxx income year.

COVID-19 lockdown measures and current restrictions has caused it to be more tedious to buy and sell. Although your numbers increased, as a result of COVID in March, April, May and June, it was not to the magnitude that you expected.

You expect capital expenses to decrease as the business matures and outgoings such as wages to decrease as entity A takes on a more active role in managing and running the business.

You have been working to establish new business activities and income streams, however this has incurred considerable capital outlay and further maintenance.

You want to expand the business so it becomes sustainable.

You have cut back on some expenditure, however other expenditure items have increased.

The recent profit and loss statements were provided.

The reason for the increase in some expenditure items for the 20XX-XX income year were provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35.

Income Tax Assessment Act 1997 - Section 35-1

Income Tax Assessment Act 1997 - Subsection 35-10(2E)

Income Tax Assessment Act 1997 - Section 35-55

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a)

Reasons for decision

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.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise his discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your situation, you do not satisfy the income requirement, that is your taxable income, reportable fringe benefits, reportable superannuation contributions and net investment losses but excluding your business losses, exceeds $250,000. 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 Commissioner does not have any discretion to exclude your one off lump sum payment from your taxable income in order for you to satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997.

Section 35-55 of the ITAA 1997 does allow the Commissioner to exercise a discretion in some limited circumstances.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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 Income tax: non-commercial business losses: Commissioner's discretion sets out the Commissioner's interpretation of the exercise of the Commissioner's 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.

Paragraph 13A of TR 2007/6 states that for those individuals who do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 special circumstances are those which have materially affected the business activity, causing it to make a loss.

In your case, you received a lump sum payment following your redundancy. Receiving this lump sum payment does not affect your business activities, causing it to make a loss. Instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

It is acknowledged that your redundancy was outside of your control, however the lump sum payment does not affect your business activities.

Being unaware of the $250,000 income requirement or your financial situation are not regarded as special circumstances for paragraph 35-55 (1)(a) of the ITAA 1997 purposes.

We also acknowledge that COVID-19 is outside your control and that your buying and selling was more tedious as a result. However, it is not considered that COVID caused you to make a loss. The business made losses before COVID and although COVID affected the business activities from March 2020 to June 2020, it did not cause your business to make a loss in the 20XX-XX income year.

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 your circumstances in the 20XX-XX income year.

As you cannot claim your loss in the current year under the non-commercial loss rules, your losses are deferred until a future year.