Private ruling: Non-commercial losses and the Commissioner's discretion
Published: December 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: January 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 breeding and racing activity in your calculation of taxable income for the 2009-10 to 2014-15 financial year? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-55 | Income Tax Assessment Act 1997 Paragraph 35-55(1)(a)

Reasons for decision: Summary: For the 2009-10 and later income 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, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) 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. 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 do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances: · your 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 one of the four tests. No exhaustive definition of 'special circumstances' is provided in the ITAA 1997. However, the term has received considerable judicial consideration in respect of other legislation. In the case Community Services Health, Minister for v. Chee Keong Thoo (1988) 78 ALR 307; (1988) 8 AAR 245 Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation at ALR 324: Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course... In the case Employment, Education, Training Youth Affairs, Department of v. Barrett (1998) 82 FCR 524; (1998) 52 ALD 499; (1998) 27 AAR 291 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed at FCR 530 that: The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course. Tamberlin J went on to say: The AAT observed in Re Beadle and Director-General of Social Security (1984) 6 ALD 1 at 3 (which was approved by the Full Court in Beadle v. Director of Social Security ) (1985) 60 ALR 225): An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special. In your circumstances, because of the GFC, you had cash flow problems and have liquidated assets causing high capital gains. You have not made a profit in any year since the commencement of the activity and you have not provided evidence to show that but for any special circumstances, you would have made a profit in the 2009-10 to 2012-13 financial years. Failing the income requirement under subsection 35-10(2E) of the ITAA 1997 for any reasons is not considered to be 'special circumstances' as it does not affected the business activity or cause it to make a loss. Therefore, the Commissioner cannot exercise the discretion for special circumstances in the 2009-10 to 2012-13 financial years. Consequently, you must defer the loss to a future year where the loss can be claimed against a profit from your business activity.

Relevant facts: You commenced a breeding and racing activity in January 20XX. | You employ trainers to train for racing. | Your intentions are to auction animals off and to race. | Your activity has not made a profit in any financial year to date. | You have had cash flow problems due to the Global Financial Crisis (GFC) and have liquidated assets, which has caused high capital gains. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year.