Private ruling: Non-commercial losses - Commissioner's discretion
Published: June 2013
Ruling period: Year ended 30 June 2012 Year ending 30 June 2013
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 activity in your calculation of taxable income for the 2011-12 and the 2012-13 financial years? | A1: No.

Relevant facts and circumstances: You undertook your first business project with the intent to rent out the property until you obtained permits to redevelop it. This project is not necessarily going to be the last. Over many years you have owned other properties and you have also been involved in the management and ownership of other entities that are in the business of ownership, management, subdivision and development of properties. You were involved in all facets of the project and drew on your experience obtained from these entities. The building permits took some time to obtain due to objections. However the permits were eventually obtained. You prepared a feasibility to redevelop the property and spoke with local agents to ascertain the viability of undertaking the project. The building was scheduled to be finished in 2011. The builder was unable to finish the building within the agreed time period and as at 30 June 2011 the development was still in progress. Throughout the 2011 and 2012 years you had significant issues with the builder and he was eventually placed into liquidation. You made a claim on the builder's insurer for losses incurred but you were advised that the insurer had rejected your claim for compensation. On objection you were advised that the claim for compensation was accepted. You will now proceed with finalising the project however the ultimate sale of the property is likely to occur in the 2013-14 financial year. The circumstances beyond your control have delayed the completion of the project and thereby delaying the expected profit in both the 2011-12 and the 2012-13 financial years. These circumstances include: · Delays due to neighbours' objections. · Delays due to the builder not being able to complete the project. · Delays due to the builder going into liquidation. · Delays due to the insurer rejecting the compensation claim You consider that had these circumstances not occurred the project would have concluded by mid to late 2011 resulting in an anticipated profit on the sale of the property. For the 2011-12 financial year your income for non commercial loss purposes exceeded $250,000 and you also expect your income for the 2012-13 financial year to exceed $250,000.

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

Reasons for decision: Summary: For the 2009-10 and later financial 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 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 financial 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. Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the 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. You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2011-12 and 2012-13 financial years due to delays caused by; · neighbours objections. · the builder not being able to complete the project as per the contract. · the builder going into liquidation. · the insurer rejecting the compensation claim. The question that must be addressed is whether these situations are considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary. Therefore the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.