Edited version of private advice

Authorisation Number: 1052305318950

Date of advice: 10 October 2024

Ruling

Subject: Commissioner's discretion - special circumstances

Question 1

Are you carrying on a business as a tour operator?

Answer

No.

Question 2

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 activity in your calculation of taxable income for the 2022-23 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

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

You carry on a tourist operator activity, where you book tours and are personally the tour guide and driver.

You also work a part-time job.

You commenced the activity over a decade ago.

You claimed that the planned scale of the activity was significant, as you were planning to not just support yourself and your family from the proceeds, but to expand to various locations (locally and internationally; however you believe due to circumstances outside your control, you incurred some losses.

Your clients are from a particular background, who are having their bookings organised through various agencies.

You provide your tours in particular languages for tourists, who don't speak English fluently and who need tourist services in these languages. You speak these languages.

You organise tours and provide services as a driver of a tourist vehicle and as a tour guide. You are the sole driver.

The way you derive your income depends on multiple factors. Different charges for different trips and different times or durations. The price is the same regardless of the number of people and usually booked together. They are usually a group that are traveling.

The method of payment differs. It varies and can be through money transfer or in cash. Sometimes payment is deposited directly into your bank account.

Your services include:

•         winery tours

•         sightseeing tours

•         tours which pick-up and drop-off at the same point

•         national park tours and many other tours specifically tailored for the clients' interests and needs.

In the relevant financial year, you believe special circumstances impacted your activity.

Your activity was impacted in the following ways:

•         COVID-19 and its prolonged effects

•         a war.

You advised that your activity, similar to travel and tour services in Australia, suffered a significant loss due to the pandemic restrictions, COVID-19 and lockdowns, which heavily disrupted your activity.

Due to closure of international and domestic borders, no tourists were allowed to visit Australia during lockdowns. You advised as a result your revenue has declined over these years. It had a prolonged negative effect on your profitability.

You were negatively impacted by a war, involving the region where some of your clients came from, due to the unstable political and economic situation impacting your performance.

You believe these circumstances were outside your control and beyond your influence. They caused you disruption, a decrease in clients and tourist numbers and as a result a decline in revenue.

Your activity has not previously been profitable apart from one financial year, which was only due to government stimulus payments. You satisfied the assessable income test in that year due to the stimulus payments also, not due to income from your activity. You believe from when you started to the profit year that these years included challenging periods such as recessions and the COVID-19 pandemic, during which it was particularly difficult for businesses in the travel industry to operate.

Details of bookings from 2019 to 2023 were provided. You do not retain passenger names or their personal details to protect their privacy. You do not have details for the bookings for the trips you made and provided an excerpt of your tours. No further booking information is available.

You completed one booking in the 2023 financial year.

You do not get paid any commissions from any of the venues that you take people to on your tours.

For the year in question you also provided what you had projected the figures to look like.

You supplied details of your part-time employment history for the 2019-2023 financial years.

You claim to spend 3 days per week on the activity. The hours vary and it can be up to 6-7 hours per day.

You allocate this time primarily on weekends, after your part-time work in the afternoons, sometimes at night and during your days off.

The time spent on the activity is for bookings and for other activities. This time includes various activities such as research, contacting and communication with clients, liaising with travel agents and tourist operators, making bookings and providing tourist transport services. You spend considerable time preparing your tours and itineraries, which involves extensive research.

Every week varies. After your part-time work for a transport organisation, you focus on developing your business on a daily basis by contacting tour operators/tour agents (including agents overseas, which sometimes requires communications at night due to time differences). You also do research of potential tourist attractions which might interests tourists, such as developing routes and itineraries for national parks, or for example wine testing itineraries.

To effectively conduct wine testing tours, as an example, you need to develop your knowledge on the wine industry. This can include the details of the producers in the wine industry, the history of each winery, the types of wine they produce, their production methods and how their wines differ from others, including European wines or South American wines. If you present this topic to people who are working in the wine industry, you need to be an expert yourself, as such you need to spend a significant amount of time on research. This is just a small example.

Clients are charged per trip. For each trip the charge is different and it depends on the number of passengers and destinations. It depends on the location and the hours you spend on the trip.

You advertise your services on the internet, Facebook, various community forums and LinkedIn. You contact various tourist agencies in Australia and overseas and promote your activity with them. You provided a local and some international agencies that you work with. These agencies promote you and provide you with clients.

You use a bank account which has your Australian Business Number and Tax File Number.

You have 2 motor vehicles that you use for the activity. The vehicles are registered in your name and you use them for private use and for the activity.

You use either vehicle depending on the tour.

You expect to earn a profit in the coming years as you are changing your focus onto new clients from other countries that speak your targeted languages. You also expect to meet one of the four tests in the future.

A have a business plan. You outlined your business objectives.

To preserve your capital and limit your losses you are diversifying your activities. You are using dynamic pricing by adjusting prices based on demand and season, which can help maximise revenue.

You regularly review and monitor the expenses to maintain cost control. In recent years you incurred tax losses due to acquisition of a new asset - a vehicle and the subsequent depreciation claim resulted in a loss.

You are hopeful of improving market conditions also.

You intend to start more tours and new routes. This includes tours for local residents.

You plan to acquire more vehicles and to employ a few drivers for these vehicles as you believe there is a demand for off-road adventures in another country.

You also plan on developing trips for the elderly as you have experience working with them.

You intend to make a profit in the 2026 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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)

Income Tax Assessment Act 1997 subsection 8-1(2)(b)

Question 1

Summary

You are not carrying on business as a tour operator as you have continued to make losses and do not satisfy the relevant indicators.

Reasons for decision

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as "income according to ordinary concepts". Typical examples of ordinary income include salary, wages, dividends, rent, and proceeds from carrying on a business.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to determine whether you are carrying on a business.

The factors outlined in these court decisions are taken into consideration in the indicators set out in the Commissioner's view on whether a taxpayer is carrying on a business as set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes.

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than just an intention to engage in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is repetition and regularity of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•         whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit

•         the size, scale, and permanency of the activity, and

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Paragraph 15 of TR 97/11 states that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition paragraph 16 of TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Whether the activity has a significant commercial purpose or character

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, costs, legal requirements, and the size and scale needed for commercial viability.

You have experience transporting passengers and have been operating your activity for over a decade. You believed you could; however have not made a profit from this activity. You have held up to 2 vehicles for operating your activity. You did not diversify the activity and only focused on providing tours to particular demographics. You did not expand your activity by bringing in other tour guides or drivers to enable you to hold multiple bookings or tours simultaneously and therefore the activity did not grow to be that of a commercial nature. You advised you advised you took a hands-on approach by conducting all the research for the tours and familiarising yourself with aspects and you were on site by driving the vehicles and running the tours. However, this does not extend beyond what is expected of a tour guide where you conduct the bookings.

Whether there is a purpose of profit as well as a prospect of profit from the activity

A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made.

You have been operating for over a decade. You did not look to expand your tour offerings as you mentioned you provide them to wineries and national parks. Your income has remained very low considering that you have only worked on the activity when not at your part-time job and utilised weekends especially. Not only have you not made a significant profit and not undertook development of the activity to accommodate more clients, but you have made a loss in every financial year, but 1, which wasn't as a result of your business activity, and there is no indication that there is any prospect of profit, especially when considering your large outgoings.

It is expected that a tour operator would intend to make a profit.

Whether there is repetition and regularity of the activity

Activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry, for it to be considered a business.

In your case you are primarily occupied by your part-time work. Your bookings do not show repetition and regularity. You had 1 booking in 2019 and then your next booking was almost a year later. You had 5 bookings in the first three months of 2020 and then nothing further until the end of 2022. It is evident that COVID-19 impacted many industries; however, leading up COVID-19 and post COVID-19, you lack repetition and frequency.

You advised that usually you spend 3 days per week on the activity. The hours vary and it can be 6-7 hours per day.

Your commitment to this activity can be considered continuous if you are doing around 21 hours a week on the activity; however, the lack of results which can be seen through the earnings and low number of bookings, show it would not be to the extent of similar businesses in the industry.

Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry.

Focusing on clients from particular backgrounds, you have chosen to develop your own method of operating the activity, and have limited your customer base, rather than expanded it.

You self-manage the details of the tours and driving of the vehicles for the tourists. You travelled abroad to make connections for obtaining clients.

In the 2022-23 financial year you earned a small amount and spent a higher amount of money on a new vehicle . You also incurred substantial motor vehicle expenses.

Your activity has been operating for over 10 years and you are continuing to make losses. Your acquisitions and running costs are not being funded by the activity, but from other sources, such as your part-time job.

Your actions and involvement do not align to those of the ordinary trade as you have limited to opportunities by seeking out only specific clients making you have inadequate income opportunities. You have purchased an asset of significant value and began depreciating it, with no indication as to how you will recoup your outgoings or even make a profit. You have been conducting your activity for long enough that it should have expanded significantly.

Whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit

An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit.

You do not manage your records systematically as you advised that you do not retain names and contact details of passengers or their personal details to protect their privacy. You also do not have details of the trips you have made. No further booking information could be supplied besides what was in the excerpt from the table above.

Your income does not meet your expenses and it has not been determined how your expenses are so high for periods where you have little to no income, given that you advised there were COVID19 restrictions and border restrictions due to the war. Knowing that your target market has restrictions, you have committed to a large outlay in the purchase of a vehicle.

Your motor vehicle expenses and repairs have often exceeded your income.

Your activity is not directed at making a profit as it has not been realised due to either a lack of commitment to the activity and/or limiting your opportunities by only seeking to work with individuals speaking certain languages.

The size, scale, and permanency of the activity

An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business.

You own 2 vehicles.. Your bookings and income do not suggest any degree of size and scale as you have made a loss in every year from 2010-2023, apart from when your sole source of income was government stimulus payments, where due to the size and scale of the payments, you ended up with a profit.

The permanent nature of your activity is supported by the continued operation since 2010. You are however not operating on a scale similar to those in your industry, which is evidenced by only 1 booking in the 2023 financial year and minimal bookings in prior years.

Whether the activity is better described as a hobby, a form of recreation or a sporting activity

The pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. As was said in Ferguson at ATC 4265; ATR 877:

'... if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.'

Expenses incurred in relation to the hobby activity are not allowable deductions. However, we recognise that a hobby can sometimes turn into a business.

Often it will be the case that there is a hobby when:

•         it is evident that the taxpayer does not intend to make a profit from the activity;

•         losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how a profit can be made;

•         the transaction is isolated and there is no repetition or regularity of sales;

•         any activity is not carried on in the same manner as a normal, ordinary business activity;

•         there is no system to allow a profit to be produced in the conduct of the activity;

•         the activity is carried on a small scale.

The minimal bookings you have achieved, the amount of time you spend, and the limits you have placed on the clients you seek, no regularity to sales and the fact that you have never made a profit all lead to a conclusion that the activity is better described as a hobby.

Conclusion

Your tour operator activity does have an intention but not purpose of profit; is not conducted in a systematic and organised way and is on a smaller scale than those in the industry, limiting any possible profitability. Your running and involvement of the activity is more consistent with that of being a hobby than one carrying on a business of providing tours.

You sought the same client demographic for multiple years and there was no growth or diversification of your activity. The activity you undertook was part time and consistent in nature with that undertaken by someone not in business. There is no likelihood of profit as you have excluded a significant population and limited your client base.

The significance of these factors in determining if a business is being carried on is underlined by factors in the above cited cases. In conclusion single and overall consideration of your case against these indicators gives the impression that you are not in the business of providing tours and were a hobbyist.

You are not in business and are not required to report the income from this activity, until such time that it is considered to be a business.

You are not entitled to claim any deductions in relation to your vehicles and any travel associated with your activity is considered private and domestic in nature and cannot be claimed in accordance with subsection 8-1(2)(b) of the ITAA 1997.

Question 2

Summary

The Commissioner will not exercise discretion to allow you to offset your losses against non-business income as you are not carrying on a business and were not affected by special circumstances.

Reasons for decision

Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses provides non-commercial losses can only be used to offset non-business income where you are carrying on a business as an individual or an individual partner of a partnership.

As it has been determined that you are not carrying on a business, non-commercial losses would not apply to you; and even if you were in business, the loss was not caused by special circumstances.

Non-commercial losses

Division 35 of the ITAA 1997 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.

You satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceed $250,000) and the activity is not an excepted business activity.

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. 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/s in question where your business activity is affected by special circumstances outside your control, which caused you to make the loss.

TR 2007/6 provides guidance on how the discretion under subsection 35-55(1) of the ITAA 1997 may be exercised to determine that it would be unreasonable for the loss deferral rule in subsection 35-10(2) to apply to a loss attributable to an individual taxpayer's business activity.

Paragraph 13 of TR 2007/6 states:

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. Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35. In other cases, where the business activity would have failed a test in any event because it is still within the period that is commercially viable for the industry concerned, the special circumstances may extend the time within which that particular business activity could objectively be expected to pass a test (see further at paragraphs 24 to 27 of this Ruling).

Relevantly, paragraphs 24 to 27 of 2007/6 provide:

Interaction between the limbs

24. As stated in paragraphs 13, 13A and 14 of this Ruling, ordinarily the operation of the first limb is confined to those situations in which the business activity has been affected by special circumstances outside the control of the operators of that activity where, had these circumstances not existed, the activity would have satisfied one of the four tests in Division 35, and, in the case of individuals covered by paragraph 13A made a tax profit.

25. The first limb may also apply to a business activity affected by such circumstances during a time when 'because of its nature' it is not able to satisfy a test (or, where the income requirement is not satisfied, produce a tax profit), but this time is still 'within [the] period that is commercially viable for the industry concerned'. In such a case, the enquiry is not whether the activity would have satisfied a test (or have produced a tax profit) had the special circumstances not existed (paragraphs 35-55(1)(b) and (c) already recognise that there are reasons outside the control of the operators of the activity why this would not have occurred, regardless of the existence of the special circumstances).

26. In such cases the appropriate enquiry will be whether or not the special circumstances outside the control of the operators of the business activity have meant that there is no longer an objective expectation that within the period that is commercially viable for the industry concerned the activity will satisfy a test (or produce a tax profit).

27. The number of years for which paragraph 35-55(1)(a) may be satisfied on this basis will need to be determined on a case by case basis. However, where the special circumstances are the sole reason why the activity can no longer objectively be expected to satisfy a test (or produce a tax profit) within the period that is commercially viable for the industry concerned, but the activity is now expected to consistently satisfy a test within some later time, the discretion in paragraph 35-55(1)(a) may be exercised.

Affected by 'special circumstances'

For the exercise of the Commissioner's discretion in regard to the special circumstances limb, the business activity must be affected by special circumstances.

No exhaustive definition of 'special circumstances' is provided in the ITAA 1997. However, the term has received considerable judicial consideration in respect of other legislation.

In the case Community Services Health, Minister for v. Chee Keong Thoo (1988) 78 ALR 307; (1988) 8 AAR 245 Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation at ALR 324:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course...

In the case Employment, Education, Training Youth Affairs, Department of v. Barrett (1998) 82 FCR 524; (1998) 52 ALD 499; (1998) 27 AAR 291 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed at FCR 530 that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J went on to say:

The Administrative Appeals Tribunal observed in Re Beadle and Director-General of Social Security (1984) 6 ALD 1 at 3 (which was approved by the Full Court in Beadle v. Director of Social Security) (1985) 60 ALR 225):

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Subject to the 'special circumstances' listed in paragraph 35-55(1)(a), ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances (paragraph 47 of TR 2007/6). These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case by case basis.

While paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster', the use of the word 'including' 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 49 of TR 2007/6 states:

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).

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.

Outside the control of the operators of the business activity

For these other kinds of events, the operators of the business activity must show that the special circumstances were outside their control.

The concept of 'control' was discussed in Secretary, Department of Employment, Education and Youth Affairs v. Ferguson (1997) 76 FCR 426; (1997) 48 ALD 593; (1997) 147 ALR 295 for the purposes of subsection 45(6) of the Employment Services Act 1994. At 76 FCR 438; 48 ALD 603; 147 ALR 306, Mansfield J said:

The expression in s45(6)(a) requires that the main reason for the failure was something that the person had within that person's control. The concept of 'control' in that context is one of fact, but I think it is intended to mean something which the person could have done something about.

...

It recognises the focus of the expression upon occurrences which the person concerned could not realistically prevent.

Losses in the preceding years

In TR 2007/6, the Commissioner explains that losses in the preceding years will not preclude the exercise of the discretion where it can be demonstrated the business would have made a tax profit in the relevant income year but for the special circumstances:

Example 7A18A

129A. Alister carries on a business of breeding cattle for sale, and has done so for the past 20 years. In prior years this business activity has been very profitable. However, in the 2010 income year it was affected by drought, which caused Alister to spend much more than anticipated on fertilizer and seed to maintain the condition of his pastures. The drought also affected the average sale price per head Alister could obtain for his cattle. A large loss was made from the business for the 2010 income year.

129B. Alister did not meet the income requirement (subsection 35-10(2)(E)) for the 2010 income year. Therefore, the fact that his business activity satisfied both the assessable income and profits tests for this year does not automatically mean that the loss deferral rule in subsection 35-10(2) does not apply. This is due to the change in paragraph 35-10(1)(a), and the introduction of subsection 35-10(2E) (the income requirement). He applies for the Commissioner to exercise the discretion under the special circumstances limb in paragraph 35-55(1)(a), and decide that the loss deferral rule not apply.

129C. Alister's application shows that special circumstances outside of his control, in the form of the drought, caused his business activity to make the loss in question, where, but for those circumstances a profit would have been made.

129D. The Commissioner notes the inherent profitability of the business, as borne out by its strong past performance in this respect. He concludes that, while the factors in paragraph 35-10(1)(a) are not directly to be applied, the fact that the business continues to satisfy the assessable income test and the profits test points towards it being 'commercial' in the sense indicated by the scheme of Division 35. The Commissioner concludes that it would be unreasonable in these circumstances for the loss to be deferred, and exercises the special circumstances limb of the discretion.

129E. If the facts were that the business had not made a profit in recent times, and moreover, was not reasonably expected to do so in the future, the mere fact that, for example, the business satisfied the real property test, or the other assets test, would not, in itself, indicate that it was unreasonable for losses from the business to be deferred. This would be so, even if the business activity was affected by special circumstances to some extent, but not to the extent that these circumstances caused what would otherwise be a profitable activity to be one which made a loss.

Application to your circumstances

In your case, you claim COVID-19 restrictions that prevented you from making a profit and that you were still recovering from past restrictions, a war between countries that speak the languages that you provide your services for and now another war between other parties, that have speakers of your offered languages in one of them. You also noted that you purchased a new vehicle and the depreciation caused the loss.

COVID-19 restrictions were impactful to the wider community for the 2020-21 and 2021-22 financial years; however, you have applied for the Commissioner's discretion for the 2022-23 financial year.

Beyond 2021-22

Although COVID-19 could be seen as a special circumstance and allowed up until the 2021-22 financial year, it is no longer a special circumstance beyond that time.

TR 2007/6 states at paragraphs 14 and 15:

14. The special circumstances must be outside the control of the operators of the business activity. Such circumstances are specifically defined to include drought, flood, bushfire or some other natural disaster. In the case of other events, failure for no adequate reason to adopt practices commonly used in an industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator.

15. The discretion can be exercised in income years after the one in which the special circumstances occurred if the effects of those special circumstances continue to prevent the business activity from satisfying any of the tests in those later income years. However, there may be situations where the special circumstances, because of their continued existence, become the ordinary or usual situation. It would not be appropriate to exercise the discretion once this occurs.

For earlier financial years it is accepted that COVID and related government restrictions could be deemed a special circumstance that impacted an activity to make a profit; however consideration to past performance is also prudent. Beyond this it is deemed that there are no continuing special circumstances as COVID has become the norm, where all businesses need to carry on due to the continued existence of COVID. The government restrictions relating to travel were lifted during the 2021-22 financial year.

In addition to this the Commissioner must also be satisfied that it was because of special circumstances that the activity did not make a tax profit for the income year. Your inability to make a profit during the 2023 financial year was not the result of special circumstances, but was due to decisions you made regarding the activity. You purchased a new vehicle and your total depreciation was significant, in comparison to your income. You also have motor vehicle expenses of a significant amount. Your loss was caused by the decision to acquire a vehicle and utilise simplified small business depreciation, in addition to you choosing to limit your customer base and only bringing in minimal income from 1 booking for the entire year.

Moreover, there has been no likelihood of you ever making a profit. You have been operating for over a decade. You believe that from inception to 2021 that these years included challenging periods such as recessions and the COVID-19 pandemic, during which it was particularly difficult for businesses in the travel industry to operate. You have not been operating in a manner where a profit can be achieved. You limited your market to individuals that speak certain languages, almost exclusively being clients from overseas. You are also looking to attract further individuals that speak your chosen languages in other overseas countries. You have limited your market opportunities by focusing on a niche market segment. Your figures from your financial statements show that your activity is not profitable, especially looking at the 2019-2023 figures, based on your income and then focusing on the significant expenditure attached in comparison. Your sole profit was for the 2021 financial year due to your entire income resulting from government support payments. You did not produce any income from your activity for 2 consecutive financial years - 2021 and 2022 and are still not earning amounts where a profit will result. You had forecasted income of $50,000 and received a small percentage of this, with no indication that this figure was achievable. Your running costs are well beyond your income figures.

It is not accepted that your activity was affected by special circumstances outside your control and that these prevented you from making a tax profit in the 2022-23 financial year. Consequently, the Commissioner will not exercise his discretion in the 2022-23 financial year to allow you to include any losses from your activity in your calculation of taxable income for the 2022-23 financial year.

The losses for the 2022-23 financial year would generally be deferred until you made a profit; however as you are not in business, there are no losses to defer.