Private ruling: Non Commercial Losses - Commissioner's Discretion
Date of advice: 30 January 2017
Published: July 2017
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
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 your calculation of taxable income for the 20XX-YY and 20YY-ZZ financial years? | A1: No

Relevant facts and circumstances: Your income for non-commercial loss purposes was more than $250,000 in the 20XX-YY and 20YY-ZZ financial years. You purchased the business as a going concern in 20XX. The business is located in a town that is wholly owned and operated by a lease holder. Occupancy in the township is only available to persons employed in some way by the lease holder or its contractors. At the time that the business was purchased, redundancies had occurred at the lease holder business and further cuts were not expected. The trading figures supplied at the time of purchase should have been achievable. The financial information for the 20XX financial year showed a net profit for the business. You have provided copies of news articles confirming further redundancies occurring during the period since you have taken ownership of the business. The balance sheet for the 20ZZ financial year show the business in a net liability position You provided a budget showing the projected loss for the 20XY year. These projections have been completed based on historical data showing that most people leave the town over the Christmas period and return for school in late January. The projections may be impacted by the number of people who do not return due to the imminent closure of part of the lease holder business and further redundancies being expected. You have reduced projected wages by moving a full time staff member to casual wages working on an as needed basis.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 section 35-1 | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

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. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000. The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity. In your application, you have queried whether the Commissioner will exercise his discretion due to special circumstances. You have cited as special circumstances that further job cuts were not anticipated at the business which provides the bulk of employment for your town, and the resulting economic downturn of the area. 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. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. In your application, you have cited that you did not meet the income test in Division 35 of the ITAA 1997 due to the economic downturn of the area. It is not considered that these circumstances constitute 'special circumstances' in the way this term is used in the legislation. The decision to purchase a business as a going concern, based on an expectation to achieve figures provided by the previous owner is considered to be a normal risk associated with the running of a business. From the facts provided, we consider the failure to achieve a profit or to pass a test is due to normal business risk and market conditions rather than special circumstances envisaged under paragraph 35-55(1)(a) of the ITAA 1997. Therefore, the Commissioner is unable to exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 and the losses from your business will need to be deferred in accordance with section 35-10 of the ITAA 1997.