Edited version of private advice

Authorisation Number: 1052071312237

Date of advice: 15 December 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

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

Answer

Yes. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control which has prevented you from making a tax profit. Consequently, the Commissioner will exercise his discretion in the 20XX income year.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You commenced your business activity during the 20XX income year.

Your income for non-commercial loss purposes was less than $250,000.

You are requesting the Commissioner's discretion for the 20XX income year due to being affected by 'special circumstances' (COVID-19).

Your business was severely impacted by COVID-19 due to the interactive/physical nature of the business and the associated lockdowns.

It is evident that special circumstances (COVID-19) prevented you from meeting the profits test in the 20XX income year based on:

•         Prior to the lockdown, you had a number of students enrolled at its peak, which is when you increased your number of instructors.

•         During the first few months of the 2022 income year, you were in lockdown therefore the business came to a complete halt.

•         After lockdown ended in October 2021 your clients weren't comfortable with face-to-face contact due to the fear of contracting COVID-19 therefore you needed to reduce your number of instructors.

•         To reduce costs, you paid a fee per visit instead of renewing your membership with the swim centre.

•         Currently, the business has a reduced number of students and instructors.

During 20XX and 20XX there were numerous "one off" costs which are not recurring costs.

Your profit and loss statement shows:

•         A loss for the 20XX income year (only commenced business during the 20XX income year).

•         A profit for the 20XX income year.

•         A profit for the 20XX income year.

•         A loss for the 20XX income year.

•         A loss for the 20XX income year.

o   The general expenses claimed included upgrades of equipment.

o   The subscriptions claimed included a membership to a swim centre where the activities took place.

o   The travel expenses claimed were for one-off travel interstate.

•         A loss for the 20XX income year.

You state that without COVID-19, a reasonable estimate of fee revenue and operating expenses would have resulted in a net profit.

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 subsection 35-35(1)

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

Income Tax Assessment Act 1997 subparagraph 35-55(1)(b)(i)

Reasons for decision

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

Your business activity had been operating a few years prior to the COVID-19 pandemic and had produced a profit in each full year of operations.

You produced a tax profit in 2 out of the past 5 income years.

The business expenses claimed in the 20XX income year were minimal compared to other income years whilst you took the necessary steps to reduce costs where possible, e.g., membership fees for a swim centre.

The lockdowns affected your number of clients.

•         Based on the above, you were also required to reduce your staff of instructors.

COVID-19 (incl. the associated lockdowns) prevented the business from generating revenue during lockdowns based on the face-to-face and physical nature of the business.

Once the lockdown ended, COVID-19 still affected the business' ability to generate more revenue due to the students' fear of contracting COVID-19.

Based on the above, your business activity was affected by special circumstances outside your control which prevented you from meeting the profits test.