Edited version of private advice

Authorisation Number: 1052078368204

Date of advice: 18 January 2023

Ruling

Subject: Commissioner's discretion - special circumstances - non-commercial losses

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 20YY-YY to 20YY-YY financial years?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

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

You commenced business operations in the 20YY-YY financial year.

You provided us details on how your business was impacted by COVID-19 and the loss of a business asset.

Your business has been making a loss since it commenced.

You provided us with your business assessable income figures for the 20YY-YY to 20YY-YY financial years.

You expect your business activity to make a tax profit in the 20YY-YY financial 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)

Reasons for decision

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•                     the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a));

•                     an exception in subsection 35-10(4) applies; or

•                     the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years under consideration. Your business losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 20YY-YY to 20YY-YY financial years, on the basis of special circumstances.

'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, including drought, flood, bushfire or some other natural disaster.

For individuals who satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have:

•                     made a tax profit or

•                     passed one of the four tests.

Taxation Ruling TR 2007/6 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.

For the Commissioner to excise the discretion they must be satisfied that where a business activity has been affected by special circumstances outside the control of the operators of that activity, had these circumstances not existed, the activity would have satisfied one of the four tests in Division 35, or made a tax profit.

Special circumstances discretion is not intended to be available where the failure to make a profit or to meet a test is for reasons other than circumstances outside of the business operators' control, such as, utilising temporary full expensing or a business choice made on the number of hours worked.

In your case, you advised that had the special circumstances not applied that you would have satisfied be $20,000 assessable income test. You stated that your business was affected by COVID-19 and this prevented you from making a tax profit or passing the assessable income test. Furthermore, you advised that you were unable to operate your business for a short period due to a business asset not being available for use during the 20YY-YY financial year.

While we appreciate your situation, it is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary. Furthermore, as you commenced your business during COVID-19 we believe COVID-19 to be a standard risk of carrying out a business during these times. In addition, based on your business assessable income figures you would not have met the $20,000 assessable income test in any of the 3 financial years had the circumstances not applied.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question. Therefore, the losses from your business activity cannot be used against your other income in the 20YY-YY to 20YY-YY financial years. The losses will be carried forward to be offset against later years where there is a profit from your business activity or if you meet the requirements in Division 35 to be able to claim the deferred losses in a later year.