Edited version of private advice

Authorisation Number: 1052283482940

Date of advice: 29 July 2024

Ruling

Subject: Commissioner's discretion - non-commercial loss

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 relevant financial year?

Answer

No.

This ruling applies for the following period:

Year Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You carried on a specific business in the relevant financial year.

You provided your occupation and employer name for the salary and wage position you held in the relevant financial year.

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

You provided a draft income tax return to show your income and expenses for the relevant financial year. You have not yet lodged your income tax return.

You incurred a business loss in the relevant financial year.

Most of the business loss can be attributed to the intent to utilise temporary full expensing (TFE) measures and claiming a specific amount against a business asset (aircraft).

You provided the date, and purchase price of the aircraft.

You incurred a significant amount in expenses relating to the asset during the relevant financial year; however, these were industry standard operational expenses for the aircraft.

The aircraft was safe to use, however, to optimise safety, you made the decision to get upgrades. This limited the use of the asset in the year prior to the relevant financial year.

You were limited in the services you could provide in the relevant financial year as you were required to go through the process of familiarisation with operating the aircraft.

The familiarisation process required you to be accompanied by a more experienced pilot on each flight.

You provided a list of flights taken in the aircraft in the relevant financial year, and how they related to your business activities.

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, you do not satisfy the income requirement and 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.

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the relevant financial year, 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 do not satisfy the income requirement, 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 this discretion for the income year(s) in question where, but for the special circumstances:

•         your business activity would have made a tax profit; and

•         the activity passes at least one of the four tests or, but for the special circumstances, would have 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 48 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.

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.

Making the decision to use TFE is a choice that cannot be changed (QC 72916 and section 40-190 of the Income Tax (Transitional Provisions) Act 1997). Alternatively, there is the choice 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).

Application to your circumstances

In your case, you submitted that you intend to make the choice to use TFE provisions to claim a full tax deduction for the aircraft as a business expense in the relevant financial year. You also incurred substantial aviation expenses; however, these are industry standard operational expenses and expected in the ordinary course of carrying on your business activities.

The aircraft was deemed safe to fly on the day of purchase, and it was a choice to purchase an aircraft you were unfamiliar with, requiring you to undertake the familiarisation process. Any delays in having the aircraft available for business use due to the upgrades, or the familiarisation processes is considered a decision and within your control.

While we appreciate your situation, when the choice to use TFE measures 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. There is also no evidence to suggest that there is any other reason for the business loss that was as a result of any 'special' circumstances outside of your control. 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 business activities in the relevant financial year in your calculation of taxable income.