Private ruling: Commissioner's discretion for non-commercial losses
Date of advice: 16 December 2016
Published: May 2017
Ruling period: Year ended 30 June 201X | Year ended 30 June 201X
Date scheme commenced: 1 July 201X

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 your calculation of taxable income for the 201X-1X and 201X- 1X financial years? | A1: No.


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 200X-X0 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 financial 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, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one 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 your business would have: ● made a tax profit or ● passed one of the four tests. Taxation Ruling TR 2007/6 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. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. 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. In application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 2014-15 and 2015-16 financial years. You have argued that you started a business acting as the licensed service for a particular operator, which was later found to have set up a fraudulent business and you also intended to engage in additional services in the your area. The question that must be addressed is whether the situation described is considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary. The special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused the loss or caused you to fail one of the tests. Having regard to your full circumstances, it is not accepted that it was special circumstances that has prevented you from making a profit or passing a test. The inability of your business activity to satisfy any of the four tests is due to your personal business choices. You chose not to continue with your business due to your personal situation and returned to employment to provide a higher and more secure income to support your family. Consequently the Commissioner will not exercise his discretion in the 201X-1X and 201X-1X financial years.

Relevant facts: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | You purchased your motor vehicle through finance in 201X. | You commenced business operations in 201X. | You submit that you were affected by special circumstances in the 201X-1X and 201X-1X financial years. | You have submitted the following evidence to substantiate your claim: | ● Start-up costs spreadsheet and | ● Expected cash flow spreadsheet | You submit that circumstances impacted on the profitability of your business in the following ways: | ● You signed an agreement with an operator to deliver a product. | ● You never started working for this operator, you only signed the License Agreement with them and subsequently they did not hold up any of their requirements of the Agreement so you was unable to work for/with this operator as intended | ● This operator was found to have set up a fraudulent business and was no longer operating their business. | You had a total of $xx of gross business income in the 201X-1X financial year. | You became aware of operator's fraudulent activities during the 201X-1X financial year. | You ceased operations soon after the operator was found to be fraudulent and returned to employment to provide a higher and more secure income to support your family.