Private ruling: Non-commercial losses
Published: March 2014
Ruling period: Year ended 30 June 2013.
Date scheme commenced: 1 July 2012.

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 2012-13 income year? | A1: Yes.

Relevant facts and circumstances: You have carried on a business for many years but recently ceased operating the business due to an injury. You have received income protection for several years since the injury and recently the insurance company paying the income protection income offered and you accepted a lump sum payment to settle the ongoing payments. Prior to ceasing work due to injury your business always showed a profit. When you decided to return to work in the last few months of the financial year you produced a reasonable turnover however still made a loss for the financial year. In the following year you are posting a profit. You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the excluded year.

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 | 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 the discretion. | In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. 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 in question where, but for the special circumstances: | • your business activity would have made a tax profit | • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. | Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that: | • but for the special circumstances, you would have made a tax profit | • you have met one of the four tests or would have but for special circumstances. | Consequently the Commissioner will exercise the discretion in the 2012-13 income year.