Private ruling: Commissioner's discretion for special circumstances
Date of advice: 13 July 2017
Published: November 2017
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 20XX-XX income year? | A1: No

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business. The business is primarily concerned with breeding livestock. You commenced business operations in the 19XX-XX financial year. You submit that you were affected by special circumstances in the 20XX-XX financial year. You submit that the special circumstances impacted on the profitability of your business in the following ways: ● In 19XX, prior to starting your business, you were diagnosed with a health condition. From 20XX you began to suffer depression, health complications and side effects from your treatment for the health condition. As a result of your poor health, you were required to reduce your workload and downsize the business, with the sale of breeding stock being at significant losses from then on. ● You suffered from altered memory, irrational thinking behaviour and the inability to make rational and informed business and financial decisions. ● As a result of your altered mental state and the perception that you would never be able to utilise your savings due to the pessimistic perception of your life expectancy, you decided to spend your savings on purchasing stock. To fund these purchases, you sold your share investments which gave rise to a net capital gain of $XX in the 20XX income year. ● You have submitted the following evidence to substantiate your claim: ● -Medical report from your doctor Your other income is derived from large dividends and capital gains on the sale of your shares. The business has never been profitable. The business produced a loss of $XX in the 20XX-XX financial year. But for the special circumstances in the 20XX-XX financial year, the business would have produced an estimated loss of $XX.

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: 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. Taxation Ruling 2007/6 paragraph 13A advises that 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 ● the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. You advised that you did not begin to suffer extreme health concerns connected to the illness until 20XX. However, in the 11 years prior to 20XX, your activity still made losses. It is accepted in your case that the altered mental state and decision making ability constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. Although your business activity has passed at least one of the four tests, both limbs of Paragraph 13A of TR 2007/6 are necessary for the Commissioner to exercise his discretion. You have advised that but for the special circumstances, your business would have produced a loss of $XX in the 20XX-XX financial year. Therefore the Commissioner is not satisfied that the special circumstances put forward prevented a profit being made, and consequently the discretion under paragraph 35-55(1)(a) of the ITAA 1997, cannot be exercised to allow you to offset your losses from your business activity in the 20XX-XX financial year.