Edited version of private advice

Authorisation Number: 1052192042330

Date of advice: 14 November 2023

Ruling

Subject: Non-commercial loss - special circumstances

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 property development activity in your calculation of taxable income for the 20XX-XX to 20XX-XX financial years?

Answer

No.

This ruling applies for the following periods:

Period Ended 30 June 20XX

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You do not satisfy the under $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You commenced a business in property development on specified date.

You provided details on your profits and losses for the relevant financial years.

You ordered a new vehicle on a specified date and provided the total purchase price.

You were advised on a specified date that the vehicle would be delivered before a later specified date.

Due to COVID, freight issues, and high demand the vehicle was not available until after the provided delivery date. You were notified about this delay on a specified date.

You do not expect there to be any business activity income or expenditure in a specified financial year due to high cost of real estate.

You expect to undertake another project in a specified future financial year.

Your loss for the second relevant financial year is largely attributed against a claim for temporary full expensing of the vehicle of a specified value.

The vehicle did not have any unique features to assist in how the business activity was carried on.

You were not without a vehicle during the delay and had vehicles available to carry on the business activity.

The new vehicle was not purchased specifically to carry certain materials or tools to carry on the business activity.

You have stated that your intent was to reduce your taxable income as much as possible in one of the relevant financial years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

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

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 section 35-40

Income Tax Assessment Act 1997 section 35-45

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

Reasons for decision

Where an individual has a business loss, Division 35 of the ITAA 1997 needs to be considered.

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be considered in an income year unless:

•         The exception in subsection 35-10(4) of the ITAA 1997 applied,

•         You satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the following four tests:

­   The profits test (section 35-35 ITAA 1997)

­   The real property test (section 35-40 ITAA 1997)

­   The other assets test (section 35-45 ITAA 1997)

•         The Commissioner exercises the discretion in section 35-55 of the ITAA 1997

In your circumstances your business activity had a profit in the first relevant financial year. Therefore Division 35 is not applicable for that financial year and will only be considered for the subsequent financial year.

Commissioner's Discretion

The Commissioner's approach to exercising the discretion under subsection 35-55(1) of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion (TR 2007/6). There are two discretions available to the Commissioner under section 35-55 of the ITAA 1997: lead time and special circumstances. You have applied under special circumstances.

Special Circumstances

The special circumstances discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control.

'Special circumstances' are those circumstances which are sufficiently unusual or different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.

The following paragraphs have been extracted from TR2007/6:

41D. For individuals who do not satisfy the income requirement, the business activity must have been materially affected by special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) 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

48. Although not limited to natural disasters, paragraph 35-55(1)(a) refers to 'special circumstances' as including drought, flood, bushfire or some other natural disaster. These events are taken to be special circumstances outside the control of the operators of the business activity.

49. The special circumstances must have affected the business activity. Some indicators of the effects on the business activity that could lead to the exercise of the discretion in regard to the special circumstances limb are:

•         Destruction of stock or equipment (refer to Example 2 at paragraph 112 of this Ruling;

•         Delays in ploughing, planting, harvesting etc (refer to Example 3 at paragraph 115 of this Ruling);

•         Delay in growth of crops (refer to Example 4 at paragraph 118 of this Ruling);

•         Inability of operator to perform duties (refer to Example 5 at paragraph 122 of this Ruling);and

•         Loss of business opportunities (refer to Example 6 at paragraph 125 of this ruling).

50. In the situation where a business activity would have failed to satisfy a test even if the special circumstances had not occurred, it is unlikely that the Commissioner would consider it to be unreasonable for the loss deferral rules to apply and therefore the Commissioner would be unlikely to exercise the discretion.

In your case, the special circumstances that you have put forward for Commissioner's discretion is that the delivery of your vehicle was delayed, and not received until after a specified date due to Covid, freight issues and high demand. Although the delay itself could be considered a circumstance outside your control, the circumstance did not materially affect the business activity, causing it to make a loss. This is evidenced by the following:

•         There were no unique features of the vehicle you were waiting on to support the carrying on of the business activity.

•         You were not without a vehicle during the delay period and had a vehicle to continue to carry on the business activity.

•         The relevant financial year's business statement show expenses such as bank fees and charges, fuel and oil, repairs and maintenance, cleaning and laundry and general office expenses. These expenses have contributed to the loss in the income year; however, these were not a result of the vehicle delays or circumstances beyond your control.

•         You were affected by the delay in the first relevant financial year; however, your business activity produced a profit of a specified amount, showing that despite the delays, the business activity was able to make a profit.

The second financial year business worksheet you provided, demonstrates that the business activity incurred a loss of a specified amount. Most of this loss was attributable to the choice of using the temporary full expensing (TFE) measures, and claiming depreciation of a specified amount against the vehicle, and was not attributable to any expenses incurred directly associated to carrying on the business activity through the delay period.

Temporary full expensing (TFE) - depreciation and other expenses

It is common for taxpayers to utilise TFE provisions to claim an immediate deduction for the purchase of a new asset. This is a decision made by the taxpayer to purchase the asset and/or use the TFE provisions.

You have made the decision to use TFE in the second relevant financial year which is a choice that cannot be changed (QC 72916 and section 40-190 of the Income Tax (Transitional Provisions) Act 1997). Alternatively, you could have chosen to instead apply the general depreciation rules in Division 40 of the ITAA1997 (Law Companion Ruling LCR 2021/3 paragraphs 86 to 90, 150, 154 and 155). When the choice to use the value of the immediate write-off of assets has resulted in the business failing to make a tax profit, the Commissioner's discretion under the special circumstances provision is not granted, as you have full control of this decision.

Due to the delay in receiving the vehicle, you were not able to claim deductions in your taxable income in the first relevant financial year as you had intended to. You have asked to claim a specified value of non-commercial losses in the second relevant financial year, that could have been used in the first relevant financial year if circumstances had been different, and the vehicle had been delivered prior to a specified date. Non-commercial loss provisions do not allow for this, and there are no other provisions of the law that allow you to claim an amount that could have been used in the previous financial year.

Conclusion

Division 35 applies to certain business activities that incur a loss. As your business activity produced a profit in the first relevant financial year, Division 35 is not applicable for that financial year.

In the subsequent financial year, your business incurred a loss due to your decision to use TFE measures, and not due to any costs or expenses associated with the delay in receiving the vehicle. Therefore, the Commissioner will not exercise the discretion outlined in section 35-55(1)(a) of the ITAA 1997 to allow you to include any loss from the property development activity in the second relevant financial year in your calculation of taxable income.