Edited version of private advice

Authorisation Number: 1052161476022

Date of advice: 13 September 2023

Ruling

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

Question

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

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 20YY

Income year ended 30 June 20YY

Income year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

XX (you) commenced a business called 'XX' in 20YY.

You established 'XX' to raise awareness in the community about XX through your own lived experience.

Your business consisted of organising events such as morning teas at local community centres throughout XXXX, to share your story and to provide brochures on mental health organisations, such as Lifeline, Beyond Blue and Perinatal Anxiety and Depression Australia with a portion of the revenue being used for fundraising for mental health charities.

You wrote articles and conducted publicity to raise awareness about XX and to ensure attendances at events were at your projected level.

You provided an explanation of the basis of your projected income and expenditure and business income and expenses spreadsheets.

In the first month of your business, you focused on advertising and marketing. This included creating an Instagram business channel, Instagram training sessions, development of a social media strategy, organising a trademark, purchasing materials and supplies, printing and developing a website. You believed most of these expenses were one off, as your projected expenses would only be purchasing tea/teacups to sell, printing for information to hand out at events and on-going website maintenance.

Your start-up costs for the business from 1 July 20YY were as follows:

•                     $X - marketing to establish Instagram business channel/Instagram training sessions/developing social media strategy

•                     $X - trademark (business set up)

•                     $X - materials/supplies

•                     $X - printing

•                     $X - web design (build an ecommerce store - website)

•                     $X - filmography to video images related to products to be used on website

•                     $X - hosting (website)

You had planned to continue these events on a regular basis, but during January and February 20YY, there were concerns that COVID-19 could make its way to XXXX. After XXXX COVID-19 was announced in XXXX on DD January 20YY and up to when the first lockdown happened, you felt you were unable to organise any further events due to the uneasy feelings about the new virus.

With lockdowns, including stay at home orders and shutdowns of all community centres in XXXX from 31 March 20YY, this prevented you from hosting events and selling products which were your two primary sources of revenue.

By 30 June 20YY you had spent $X in start-up costs and made only $X in revenue. This left you with a business loss of $X which you don't believe you would have had, had it not been for the COVID-19 pandemic.

Further lockdowns in XXXX continued to take place. Some businesses made the transition from in person to online and it was still important to you that your events take place in person to provide a sense of intimacy, connection, and empathy for those that attended. You believed it would be near impossible to replicate that atmosphere online or via video.

During COVID-19, you continued to pay for materials and supplies as well as website maintenance fees and social media management fees, in the hope that things would turn around. You spent $X in expenses and made $X from selling products. This left you with another business loss of $X.

After much consideration and with the uncertainty surrounding the COVID-19 virus, you made the tough decision to cease the business.

Your income, for non-commercial loss purposes, in the relevant years was more than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 subsection 35-55(1)

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

Reasons for decision

Issue

Question

Summary

The Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business 'XX' in the calculation of your taxable income for the 20YY to the 20YY income years.

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

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

The income requirement under subsection 35-10(2E) will be met if your income for non-commercial loss purposes is less than $250,000.

In your case, the income requirement under subsection 35-10(2E) is not met as your income for non-commercial loss purposes was above $250,000.

Your business activity does not meet any of the exceptions at subsections 35-10(4) or 35-10(5).

If the income requirement is not met, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise discretion for the income years in question where but for the special circumstances:

•                     your business activity would have made a tax profit

•                     the activity passes at least one of the four tests or,

•                     but for the special circumstances, would have passed one of the four tests.

Paragraph 12 of TR 2007/6 states the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income years in question where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Paragraph 35-55(1)(a) refers to 'special circumstances outside the control of the operators 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.

Paragraph 54 of TR 2007/6 states that the use of the word 'including' in paragraph 35-55(1)(a) indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, 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.

Paragraph 55 of TR 2007/6 states, for these other kinds of events, the operators of the business activity must show that the special circumstances were outside their control.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Paragraph 41B of TR 2007/6 states, access to the special circumstances limb is not limited to those individuals who satisfy the income requirement. Individuals who do not meet the income requirement, but who can demonstrate their business is commercial, and has been affected by special circumstances, may also be considered under the special circumstances limb.

Paragraph 41C of TR 2007/6 states, for a business activity to be regarded as 'commercial' for the purposes of Division 35 four objective tests are provided, at least one of which must be satisfied, or would have been satisfied but for the special circumstances. These tests are:

•                     Assessable income test (section 35-30)

•                     Profits test (section 35-35)

•                     Real property test (section 35-40)

•                     Other assets test (section 35-45)

Application in your circumstances

You do not satisfy the income requirement in subsection 35-10(2E) and the activity is not an excepted business activity.

Having regard to your circumstances and the principles set out in TR 2007/6 it is accepted the 'special circumstances limb' paragraph 35-55(1)(a), has been satisfied. The special circumstances created by government lockdowns prevented you from making a tax profit in the 20YY, 20YY and 20YY income years.

You showed that you had the intention of making a profit from this business by the amount of time and money spent on advertising and marketing, which included creating an Instagram business channel, Instagram training sessions, development of a social media strategy, organising a trademark, purchasing materials and supplies, printing and developing a website.

However due to the uncertainty of Covid 19 virus and all the lockdowns in XXXX, you made the tough decision to cease the business. Due to the nature of your business, you were unable to take the events online as the majority of your business income was selling tickets to your events and selling products.

Consequently, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) to allow you to include the loss from your business activity in the calculation of your taxable income for the years ended 30 June 20YY, 30 June 20YY and 30 June 20YY.