Edited version of private advice

Authorisation Number: 1052369919468

Date of advice: 06 March 2025

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question 1

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 income year ending 30 June 2024?

Answer 1

No

This ruling applies for the following period:

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.              You own land.

2.              The land was purchased in 19XX and 20XX originally as an investment but on 1 July 20XX a business of subdividing land commenced.

3.              As at 1 July 20XX there had been XXX lots developed out of a potential XXX lots. XXX of these have been sold and XX remain unsold.

4.              The remaining undeveloped land may be developed, depending on cash flow and profitability.

5.              For the 20XX income year, your income for non-commercial loss purposes was $XX or more.

6.              You have advised you would meet the profits test during the 20XX income year.

7.              During the period of May 20XX to November 20XX, the Reserve Bank of Australia (RBA) increased the cash rate target from X% to X%. Subsequent to this, the demand for residential land contracted significantly as the borrowing capacity and affordability for the average person was massively diminished.

8.              In addition, the increase of interest rates meant the cost of servicing debt for working capital increased up to X%. State land tax changes meant the land tax on lots held by you increased over X%.

9.              You have provided further information including number of lots sold and amount of sales revenue for the financial years ending 30 June 20XX to 20XX (projected):

10.          You have provided basic profit and loss figures for the financial years ending 30 June 20XX, 20XX, 20XX, 20XX and 20XX. These figures show profits achieved for the financial years ending 30 June 20XX, 20XX, 20XX and 20XX.

Relevant legislative provisions

Division 35 of the Income Tax Assessment Act 1997

Section 35-10 of the Income Tax Assessment Act 1997

Subsection 35-10(2E) of the Income Tax Assessment Act 1997

Section 35-35 of the Income Tax Assessment Act 1997

Paragraph 35-55(1) of the Income Tax Assessment Act 1997

Paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Summary

Ordinary economic and market fluctuations that impact revenues and expenses of an industry segment as a whole are not special circumstances for the purpose of the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997.

Detailed reasoning

Division 35 of the ITAA 1997 operates to prevent certain losses from business activities carried on by individuals operating alone or in partnership from being claimed as a deduction.

Under subsection 35-10(1) of the ITAA 1997, a loss made by an individual from a business activity will not be allowed as a deduction in an income year unless:

•                The exception in subsection 35-10(4) of the ITAA 1997 applies;

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

o        The assessable income test (section 35-30 ITAA 1997)

o        The profits test (section 35-35 ITAA 1997)

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

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

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

There are two discretions available to the Commissioner under 35-55 of the ITAA 1997: lead time and special circumstances.

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 business losses: Commissioner's discretion (TR 2007/6).

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 TR 2007/6:

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

...

13A. For those individuals who do not satisfy the income requirement in subsection 35-10(2E) special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year(s) in question where:

•                but for the special circumstances, the 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 at least one of the four tests.

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.

...

TR 2007/6 goes on to explain that there is no exhaustive definition of 'special circumstances' in the ITAA 1997 and applies the judicial consideration of the term in respect of other legislation.

In the context of Division 35, TR 2007/6 states the following at paragraph 47:

47.          ...Subject to paragraphs 48 and 53 of this Ruling, ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. 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. (Refer to Example 1 at paragraph 110 of this Ruling). However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case by case basis.

In summary, ordinary economic and market fluctuations that affect business activity and which affect an industry segment as a whole, are not special circumstances for the purpose of the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997.

The Commissioner is not empowered to exercise the non-commercial loss discretion by reason of special circumstances in such circumstances.

Application to your circumstances

In this case, you have advised you consider that special circumstances exist in the form of the increases in interest rates and land tax.

Market driven fluctuations in the demand for residential land due to the price of finance are a normal incident for all participants in the residential land sale segment of the economy. Interest rate fluctuations are something that occur on a cyclical basis and are expected and usual in conducting business in the Australian economy.

Interest rate settings generally involve periods of expansion and contraction resulting in a significant overall change to the prevailing rate. This is not unusual and is a function of the economic cycle that repeats over time.

Similarly, policy decisions relating to land tax settings by State or Territory Governments are a feature of doing business in that particular State or Territory and are subject to the decisions of the Government of the day and Parliament. These changes are not uncommon and repeat over time

For these reasons, the Commissioner is not empowered to treat interest rate and/or land tax driven changes in demand for residential real estate as special circumstances for the purposes of exercising the non-commercial loss discretion in paragraph 35-55(1)(a) of the ITAA 1997.