Private ruling: Non-commercial losses
Published: August 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2006

Ruling: Q1: Will the Commissioner exercise the discretion in section 35-55(1) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2011-12 financial years? | A1: Yes

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 as a result of income protection payments you receive due to illness. You carry on a business. You commenced business operations in the 2006-07 financial year. You have provided independent evidence that attests that in general operating profit for your industry can be achieved in 3-5 years. Part way through the 2009-10 financial year you were diagnosed with an illness. In 2010 due to medical reasons you were no longer able to undertake any of the physical work on the business. As your working capacity had significantly diminished it was necessary to hire additional staff which increased business costs. You expect to make a profit in the 2012-13 financial year. You estimate that you would have made a profit by the 2011-12 financial year had it not been for your illness.

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) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

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 · 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 income year in question where: · it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests · there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. The relevant discretion may also 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. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented you from making a tax profit. It is also accepted that you were affected by special circumstances which extended the commercially viable period for your activity. Consequently the Commissioner will exercise his discretion in the 2009-10 to 2011-12 financial years.

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.