Private ruling: Non-commercial losses
Published: March 2014
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 2011

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 in the calculation of your taxable income for the relevant financial year? | A1: No

Relevant facts and circumstances: You operate a business. The business has previously been profitable. Market conditions significantly affected the trading conditions of the business and the business incurred losses in the 200X through to the 20XX financial years. Your business meets the assessable income test for the relevant income year however your income for non-commercial loss purposes was over $250,000. During the relevant financial year, you made the decision to cease your business. In order to obtain the funds required to cease your business, you sold capital assets and made a capital gain. If you had not sold the assets in order to wind up your business, your income for non-commercial loss purposes would not have been over $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1 | Income Tax Assessment Act 1997 - Section 35-55 | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a) | Income Tax Assessment Act 1997 - Subsection 35-10(2) | Income Tax Assessment Act 1997 - Subsection 35-10(2E)

Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise his discretion to allow the inclusion of the losses. A taxpayer will satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if their income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement for the 2011-12 financial year as your income for non-commercial loss purposes was above $250,000. The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss. 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. Market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances (paragraph 47 of TR 2007/6). In your case, you sold a number of assets in order to raise the funds required to wind up your business. The sale of these assets resulted in a capital gain and raised your income for non-commercial loss purposes above $250,000. The sale of the assets did not affect your business; instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Similarly, the declining market which ultimately led to you deciding to cease operating your business is not considered to be 'special circumstances'. Market fluctuations, irrespective of how abnormal, are considered to be normal risks associated with trading in your industry. Accordingly, the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business in the calculation of your taxable income for the 2011-12 financial year.