Private ruling: Non-commercial losses - Commissioner's discretion
Published: November 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

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 your calculation of taxable income for the 2011-12 financial year? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Subsection 35-10(4) | Income Tax Assessment Act 1997 Subsection 35-30 | Income Tax Assessment Act 1997 Subsection 35-35 | Income Tax Assessment Act 1997 Subsection 35-40 | Income Tax Assessment Act 1997 Subsection 35-45 | Income Tax Assessment Act 1997 Subsection 35-10(2E). | Income Tax Assessment Act 1997 Subsection 35-55(1) | Income Tax Assessment Act 1997 Paragraph 35-55(1)(a).

Reasons for decision: Summary: Non-commercial losses Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: · the exception in subsection 35-10(4) of the ITAA 1997 applies; or · you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or · if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply. Your income for non-commercial loss purposes is less than $250,000, therefore, you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2011-12 financial year. The Commissioner's discretion - special circumstances Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: · the business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and · the special circumstances affecting the business activity are outside the control of the business activity. Taxation Ruling TR 2007/6 sets out the 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: Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all business within a particular industry. In your case, your business activity has produced an overall loss for the past three years. You believe that the current economic climate has caused your business to make a loss in past few years as your clients find it difficult to find the extra money needed to engage your services. Changes in consumer confidence and spending can and do occur for many reasons, including increases in official interest rates and seasonal pressures. These fluctuations in consumer spending are regular and recurrent and affect all businesses reliant on discretionary spending. A drop in consumer confidence and spending itself is not considered to be 'special circumstances' within the meaning of paragraph 35-55(1)(a) of the ITAA 1997. The inability of your business activity to satisfy any one of the non-commercial loss tests or make a tax profit in recent years is due to the small scale and part time basis in which it is carried on and not as a result of special circumstances. Therefore, the Commissioner will not exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your business activities against your other assessable income for purposes of calculating your taxable income for the 2011-12 financial year.

Relevant facts: You are a qualified therapeutic treatment provider and have a large client base, although only a few that you see regularly. | You commenced your business activity several years ago, and in the last five years your income from the activity has been less than $5,000; in the last three years it has been less than $1,000. In the last three years, your activity has produced an overall loss. | You currently have a room set up in your home from which you provide these services. | You have separate full time employment and only provide your services for approximately 10 hours a week. | You have not advertised your business for the past two years to reduce costs. | In 2011, you purchased a computer and plan to develop a website to advertise your services. | Your income for non-commercial loss purposes in the 2011-12 financial year was less than $250,000