Private ruling: Non-commercial losses
Published: August 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015
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 the calculation of your taxable income for the 2013-14 and the 2014-15 financial years? | A1: No.

Relevant facts and circumstances: Your business activities commenced in the 2009-10 financial year. You had a work injury and in 2010 you had to undergo surgery which you gradually recovered from. While recovering you continued your employment and building your business. However around March 2011, you had a relapse and since then have been limited in your business and work activities. You satisfied the $20,000 assessable income test for the 2010-11 financial year, but have not satisfied the relevant tests in the following years. You estimated that you would undergo treatment for a six to twelve month period. However, your recovery has been slower than expected. Your doctor advises you continue to have restricted duties related to the number of hours worked per day, duration of sitting, standing and travel with a maximum 30 minutes with a five minute break. Your condition is managed with home exercise, physiotherapy and swimming. You continue to improve and as your fitness improves you will be able to extend your duties. You may not make a full recovery. Your condition will be reviewed in 2015. While your focus has been in keeping your primary job you have been able to continue some of the projected work as per your business plan. However, it has been physically strenuous to continue work on your business after your normal job hours. You have maintained 40 hours with your normal job throughout your injury period. You have retained your normal duties. In the 2013-14 financial year you spent from one to four hours on weekdays and from 0 to 10 hours per day on weekends on business activities depending on how much you can manage. You fully complete 80 to 90% of your business activity. The remaining 10 to 20% of your business activity is sales. With your delayed recovery from your surgery you were not able to pursue all the planned sales but you did carry out some which generated some revenue. You have not chosen your primary employment over your business as you have carried out both to the extent that you were physically able. The special circumstances are not just the hours spent on your business but the inability, due to a medical condition, to pursue fully a small part of your business. You are hoping to increase your business hours in the 2014-15 financial year. You have found it hard to increase sales as it means you have to travel to meet clients and this has been difficult with your condition. As it is essentially a client facing business you have been looking into other options of acquiring clients, such as establishing an office or employing sales staff. You are hoping to continue to build your business but you have been advised to work at a slower pace until full recovery. You are hoping to make $ business income in the 2015-16 financial year. You will later make an assessment if you can physically sustain the business or if you have to cease. You satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997.

Relevant legislative provisions: 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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the financial years under consideration. The Commissioner's discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. The following paragraphs of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (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. 55. …the operators of the business activity must show that the special circumstances were outside their control. The concept of 'control' was discussed in Secretary, Department of Employment, Education and Youth Affairs v. Ferguson (1997) 76 FCR 426; (1997) 48 ALD 593; (1997) 147 ALR 295 for the purposes of subsection 45(6) of the Employment Services Act 1994 . At 76 FCR 438; 48 ALD 603; 147 ALR 306, Mansfield J said: The expression in s45(6)(a) requires that the main reason for the failure was something that the person had within that person's control. The concept of 'control' in that context is one of fact, but I think it is intended to mean something which the person could have done something about. 56. And at 76 FCR 438, 48 ALD 603; 147 ALR 306: It recognises the focus of the expression upon occurrences which the person concerned could not realistically prevent. 57. However, if the operators of the business activity fail for no adequate reason to adopt certain practices commonly used in their industry to prevent or reduce the effects of certain circumstances… then that may point to the circumstances being within their control. Your injury occurred in the 2009-10 financial year and required surgery. You passed the assessable income test in Division 35 of the ITAA 1997 in the 2010-11 financial year and the Commissioner exercised the discretion for the 2011-12 to the 2012-13 financial years for the special circumstances of injury. To exercise the discretion further would imply that the injury was the only reason none of the tests of Division 35 of the ITAA 1997 could be passed. You maintained 40 hours per week in your primary employment in the 2013-14 financial year and you were able to conduct all of the desk bound activity of your business but not all of the sale activity. You found it too strenuous to continue work on your business after your normal work hours notwithstanding that you produced sales. You also recognise that your business may produce better results as you have considered establishing an office or employing sales staff. Paragraph 57 of TR 2007/6 indicates that where you choose not to reduce the effects of special circumstances then it follows that the special circumstances are not the reason that the tests of Division 35 of the ITAA 1997 are not met. You have a choice to conduct your business differently to accommodate the effects of the special circumstances. You also have a choice to minimise the strenuous effect of your primary employment on your business however you have not taken that option. Therefore the Commissioner will not exercise the discretion for the 2013-14 financial year and the 2014-15 financial year.