Private ruling: non-commercial losses
Published: November 2011
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

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 2009-10 financial years? | A1: 

Relevant facts and circumstances: You operated a business with your spouse. In the 2009-10 financial year your spouse passed away. Your spouse's death affected the profitability of the business. You commenced a new partnership with another family member carrying out the same business activities. In the 2009-10 financial year the new partnership returned a profit but not enough to offset the losses from the previous partnership in the same year. Your income for non-commercial loss purposes for the 2009-10 financial year exceeded $250,000 because of a lump sum you received.

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

Reasons for decision: Summary: For the 2009-10 and later financial year, 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 and · 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. | Detailed Reasoning - Special circumstances: In your case, you received a lump sum payment. Receiving the lump sum payment did not affect your business, causing it to make a loss. 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. Taxation Ruling TR 2007/6 Income Tax: non-commercial business losses: Commissioner's discretion sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a). The following example has been extracted from paragraphs 122 to 124 of this Ruling 122. Allison runs a dance instruction business which satisfied the assessable income test in the 2004 income year and was expected to satisfy this test again in the 2005 income year. However in the 2005 income year Allison broke her leg and was unable to dance for 6 months. Allison had to cancel all her bookings for 6 months and as a result incurred a loss for the 2005 income year. 123. Allison's business did not satisfy any of the tests in Division 35 in the 2005 income year. If the Commissioner does not exercise the discretion in the 2005 income year the losses from the dancing instruction business activity will be deferred. 124. In this case the Commissioner would exercise the discretion in paragraph 35-55(1)(a) for special circumstances. Allison is a key person in the dancing instruction business. Her broken leg and inability to teach for 6 months would be special circumstances which were outside her control. The business activity was expected to have satisfied a test if not for these special circumstances and consequently the Commissioner would be satisfied that it would be unreasonable for the loss deferral rule in section 35-10 to apply. As a result, Allison is able to offset her business losses against her other assessable income in the 2005 income year. Your situation can be compared to that discussed in TR 2007/6 in that due to your spouse's illness participation in the management of the business was limited. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control, that is, the illness and death of your spouse. Further, it is accepted that: · but for the special circumstances, you would have made a tax profit and · you have met one of the four tests or would have but for special circumstances. Consequently the Commissioner will exercise his discretion in the 2009-10 financial year.

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