Private ruling: Commissioner's discretion and non-commercial business losses
Date of advice: 11 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise the 'special circumstances' 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 2013-14 financial year? | A1: Yes.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You started a business in the latter part of the 2013-14 financial year. You traded for a short period but had to stop temporarily as the relevant licence fee charged by the government body for your region was unexpectedly increased by over 6000%. You immediately started applying to government bodies in other regions for a licence. A licence was not approved until early in the next financial year. Your business activity has passed one of the tests or is profitable in the 2014-15 financial 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), and | Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision: Summary: 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 • the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have: • made a tax profit or • passed one of the four tests. 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 54 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. However the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. The question that must be addressed is whether your circumstances are considered special circumstances as identified in TR 2007/6. In your case at the time you commenced your business you intended to trade in a particular area. However after an unexpected increase in the mandatory license fee or more than 6000%, your business could not afford to trade in that area and you were forced to apply to trade in other areas. The application process to trade in a certain area took several months to complete, which impacted on the ability of your business to meet one of the four tests or make a profit. Since you began trading in the 2014-15 financial year, you have passed one of the one of the four tests or made a tax profit. Having regard to your full circumstances, it is accepted that the unexpected increase in a mandatory licencing fee of more than 6000% by a government body is considered special circumstances outside your control, and this prevented you from meeting one of the four tests or making a tax profit. Therefore, the Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2013-14 financial year.