Private ruling: non-commercial business loss
Published: February 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

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 primary production activity or, non primary production activity, in the calculation of your taxable income for the 2010-11 financial year? | A1: 

Relevant facts and circumstances: You are a partner in a primary production business activity. You are also a sole trader in a non primary production business activity. Both business activities made a loss in the 2010-11 financial year. Both business activities passed at least one of the four tests for non-commercial business losses in the 2010-11 financial year. You made a capital gain in the 2010-11 financial year which caused your income for non-commercial loss purposes to exceed $250,000. You do not expect your income to exceed $250,000 in the 2011-12 financial year.

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

Reasons for decision: Summary: The Commissioner will not exercise the discretion for special circumstances to allow you to include the loss from your primary production activity or, non primary production activity, in the calculation of your taxable income for the 2010-11 financial year. This is because the receipt of the capital gain did not affect your business activities or cause them to make a loss, as such, the losses are not considered to be due to special circumstances that were outside your control. | Detailed Reasoning - Non-commercial loss: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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). The exceptions do not apply as one of your activities is not a primary production activity so is expressly excluded from the exceptions. The other business activity is a primary production activity however, your income from sources not related to the primary production activity exceeds $40,000, as such the exception does not apply. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. | Detailed Reasoning - Commissioner's 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. In your case, you made a capital gain from an investment you held. Receiving the gain did not affect either of the business activities nor cause them to make a loss. Instead, it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. Therefore, while both your business activities passed at least one of the four tests, neither of the business activities have made a tax profit. This would have been the case whether the capital gain was received or not, as such, the situation is not considered to be one of 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Having regard to your full circumstances, it is considered that neither of your business activities were affected by special circumstances outside your control, causing them to make a loss. Consequently the Commissioner will not exercise his discretion, under paragraph 35-55(1)(a) of the ITAA 1997, in the 2010-11 financial year for either business activity. Therefore, your losses for both business activities must be deferred.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.