Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 2 August 2016
Published: September 2016
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
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 1997 (ITAA 1997) to allow you to include any losses from your business activity (the activity) in your calculation of taxable income for the 20XX-YY to 20YY-ZZ financial years? | A1: Yes.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. During the 20WW-XX financial year you commenced carry on an activity. You advised that in August 20XX you noticed the effects of an illness, which was impacting on your ability to perform your activity. You consulted with a doctor in 20YY, who diagnosed you with an illness which commenced in 20XX. To be eligible for income protection insurance you must meet claim criteria and be certified by medical professionals as suffering an illness. Your income protection insurance claim commenced in 20YY. You submit that due to the nature of the illness you are only able to work in a diminished capacity, and as a result your activity has made a loss for the 20XX-YYand 20YY-ZZ financial years. Before the illness impacted on your ability to work, you earned $X during one week early in the first quarter in the 20XX-YYfinancial year, as evidenced by your July to September 20YY business activity statement. You are of the opinion that had you not been affected by the illness, you would have earned more than $20,000 for 20XX-YYand 20YY-ZZ financial years. You are receiving ongoing treatment for the illness. You believe that you are on track to recovery and expect to be able to perform in your activity at 100% capacity in due course.

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, 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 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 satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you meeting one of the four tests. Consequently the Commissioner will exercise his discretion in the 20XX-YY to 20YY-ZZ financial years.