Private ruling: Non-commercial losses and the Commissioner's discretion for special circumstances
Date of advice: 10 July 2017
Published: November 2017
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act (ITAA 1997) to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 20XX-XX financial 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 X pharmacy businesses. The businesses are primarily concerned with pharmaceutical operations. You commenced business operations prior to 19XX. In the 19XX’s another business was introduced. In the 20XX-XX financial year, Y of the X pharmacies was sold to free up capital. This capital was then to be injected into the new business to keep that new business profitable. With market competition and the introduction of assisted machinery in the new business, additional working capital was and is required to maintain the new business competitiveness. 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: ● Due to the sale of the Y pharmacies, there was a write down of stock, a write off of fixed assets and the payment of all liability provisions for holiday pay and long service leave for employees. These conditions of sales inadvertently increased the pharmacies losses.

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 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(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. 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 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. In application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 20XX-XX financial year. The question that must be addressed is whether the situation described is considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. The disposal of the Y pharmacies is a result of a business decision that was made by you, to enable Z pharmacy to be more profitable due to market competition and the increase of business costs. We believe these occurrences to be standard risks of carrying out a business in your industry and are 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