Edited version of private advice

Authorisation Number: 1052332084330

Date of advice: 15 November 2024

Ruling

Subject: Commissioner's discretion - 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 in the calculation of your taxable income for the 20XX income year?

Answer

No, the redundancy payment does not affect your business activity causing it to make a loss.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your business activity commenced on 1 July 20XX.

You are seeking the Commissioner's discretion for the 20XX income year based on special circumstances.

Your income for non-commercial loss purposes during the 20XX income year was $XXX or more.

The business generated at least $XX in assessable income therefore the assessable income test was met during the relevant income year.

During the relevant income year, you received a redundancy payment which caused you to exceed the $XXX income requirement.

Your business incurred a loss of over $XX in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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 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 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise his discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your situation, you do not satisfy the income requirement, that is your taxable income, reportable fringe benefits, reportable superannuation contributions and net investment losses but excluding your business losses, exceeds $250,000. 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.

The Commissioner does not have any discretion to exclude your redundancy payment from your taxable income in order for you to satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997.

Section 35-55 of the ITAA 1997 does allow the Commissioner to exercise a discretion in some limited circumstances.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion 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.

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Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph.

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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.

Paragraph 13A of TR 2007/6 states that for those individuals who do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 special circumstances are those which have materially affected the business activity, causing it to make a loss.

In your case, you received a redundancy payment. Receiving this payment does not affect your business activities, causing it to make a loss. Instead, it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

It is acknowledged that your redundancy was outside of your control, however the lump sum payment does not affect your business activities.

While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in your circumstances in the 20XX income year.

As you cannot claim your loss in the 20XX income year under the non-commercial loss rules, your losses are deferred until a future year.