Private ruling: Non-commercial losses
Date of advice: 23 November 2015
Published: January 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2013

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 business activity in your calculation of taxable income for the 2014-15 financial year? | A1: No.


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. 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 2015 financial year. You submit the special circumstances have affected you in various ways. 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. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary. It should be noted that even in a situation where one's circumstances do constitute special circumstances, the Commissioner must also be satisfied that the 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. In your case, financial records you have submitted in support of this application indicate that it is highly unlikely you would have made a profit in the 20YY financial year even if your stated situation had not existed. It would be expected that if the circumstances stated (being damage to reputation) affected your business in such a way that they were the cause of your loss, this would be reflected in the business income being reduced, however; the income has increased considerably since the previous year. The provided 5 year projection also shows a steady and substantial increase each year. It is apparent from the financial records you have submitted, that the only factor creating tax losses was the quantum of expenses the business has incurred and not from any external factors beyond your control. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2015 financial year.

Relevant facts: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | The business is primarily concerned with the non-primary production activity located on your property. | You commenced business operations in the 20XX financial year. | You submit that you were affected by special circumstances in the 20YY financial year. | You have submitted the following evidence to substantiate your claim: | • Financial statements for 20XX and 20YY | • Depreciation schedules for 20XX and 20YY | • Financial forecast for 2016 to 2020 inclusive | You submit that special circumstances impacted on the profitability of your business. | You intend to return to profit in the 2018 or 2019 financial year.