Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 4 November 2016
Published: March 2017
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: 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 the calculation of your taxable income for the 20XX-YY financial year? | A1: Yes.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You have been carrying on activity X since 20ZZ. Whilst conducting activity X, you entertained the idea of carrying on a business of Y. Upon considering the results of informal market research, you considered that there was business and commercial justification for the activity in Australia. In 20XX you commenced activity Y. From 20XX you were involved in an annual event, where people would come together in one of the Australian capital cities to celebrate their culture. In 20YY the event came to your city (city A), bringing with it more than a thousand people. The event was to include sports and other cultural activities, and you were entrusted with the responsibility of providing some activities for the events attendees. You had scheduled activity Y to coincide with the event in city A and city B. The event in city A was scheduled to be held one day, and the event in city B on the following day. For the city A event, you entered into an agreement with a venue operator to commence the activity at a certain time. However, the event started later than the advertised time. The delay resulted in an impatient crowd outside the venue. As a result many of the patrons left and went to other venues. You have provided a statement from a witness at the venue stating that they observed approximately X people who had turned up to the event, became angry at the delay and left. A small number of people eventually entered the delayed event. You advised that images taken of the poor attendance at the city A event were posted on social media, and city A attendees stated that the event in city B was going to be unsuccessful, spread throughout the community. You believe that this caused the low attendance at the city B event. For the two events you made a small amount of income from the ticket sales, however you made a substantial loss for the 20XX-YY financial year. You sought damages from the city A venue operator for negligence and breach of contract however, the operator went out of business. You advised that had the city A and city B events proceeded as planned, you would have passed the assessable income test or made a tax profit for the 20XX-YY financial year.

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: Summary: For the 2009-10 and later financial years, 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. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control. '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 satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you meeting one of the four tests or making a tax profit. Consequently the Commissioner will exercise his discretion in the 20XX-YY financial year.