Edited version of private advice

Authorisation Number: 1052370738220

Date of advice: 07 March 2025

Ruling

Subject: CGT - small business concessions

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 a business activity in the calculation of your taxable income for the 20XX income year?

Answer 1

No.

Question 2

Does the Property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes. You owned the Property for over X years, during which time the Property was used or held ready for the use in the course of carrying on a business by you for over X years.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your business activity commenced in the 20XX income year.

You were operating shops under your ABN as a sole trader.

The timeline regarding the business is as follows:

•                For the first X years, you rented the Property.

•                In the 20XX income year, you purchased the Property.

•                For just over X years, you owned the Property and operated your business there.

•                For another X years, you rented the Property out while you left Australia.

•                You returned to Australia in the 20XX income year.

•                For X years you re-opened/operated your business at the Property.

•                In the last income tax year you sold the Property and made a capital gain of under $XX.

Your other assessable income for non-commercial loss purposes was over $XX.

Your business incurred a loss of under $XX in the 20XX income tax year which is directly associated with the sale of the Property.

After placing the shop on the market in the 20XX income year, you reduced prices in your business to facilitate the sale which resulted in the current business loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 section 35-55 (1)

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

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Reasons for decision

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by a taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•                a taxpayer's income for non-commercial loss purposes is less than $XX and the business activity satisfies one of the 4 required tests

•                the exception in subsection 35-10(4) applies for the income year, or

•                the Commissioner exercises the discretion in subsection 35-55(1) to not defer the losses.

For taxpayers whose adjusted taxable income is $XX or more, the business activity must have been materially affected by special circumstances outside your control, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income years in question where, but for the special circumstances:

•                the business activity would have made a tax profit

•                the business activity passes at least one of the four tests, and

•                the special circumstances affecting the business activity are outside the control of the operators.

In your situation, you did not satisfy the less than $XX income requirement set out in subsection 35-10(2E) of the ITAA 1997 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 exceeded the income requirement due to the sale of the Property. As you have exceeded the income requirement, you are not able to offset your business losses against your other income.

The sale of the Property did not affect the business activity, causing it to make a loss. Instead, it caused you to not satisfy the income requirement measure under subsection 35-10(2E) of the ITAA 1997.

Additionally, the choice to sell the Property and reduce the prices was within your control.

It is not accepted that there were special circumstances outside of your control that affected your activity in the way this term is used in paragraph 35-55(1)(a) of the ITAA 1997 for the 20XX-XX financial year.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the year in question. Consequently, it would not be unreasonable for the loss deferral rule to apply in the 20XX-XX financial year.