Private ruling: Non-commercial business losses - Commissioner's Discretion
Published: September 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

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 2016-17 financial year? | A1: Yes

Relevant facts and circumstances: Your income for non-commercial loss purposes was more than $250,000 in the 2014-15 and 2015-16 financial years and is expected to be more than $250,000 in the 2016-17 financial year. You purchased the business as a going concern in 2014. The financial information for the 2013-14 financial year showed a net profit for the business. Similar trading figures should have been achievable in later financial years. You submit that you were affected by special circumstances in the 2016-17 financial year. You have submitted the following evidence to substantiate your claim: ● the business suffered an event resulting in its immediate short term closure You submit that the special circumstances impacted on the profitability of your business in the following ways: ● whilst the leaseholder company provided an alternative premises, you incurred extensive costs to temporarily relocate and replace lost property, and ● the business suffered losses in income for the time it was closed and being relocated. In the previous months to the event, the business was generating sales of approximately $XX,XXX per month. In the two months following the event, sales had dropped by approximately 50% in the first month and 33% in the second month You have provided a profit and loss statement for the year to date for the 20016-17 financial year. The profit and loss statement shows a net loss for the year to date. You have provided a monthly profit and loss statement for a recent month, which shows a small net profit. You have identified the following items which are expenses incurred directly as a result of the event: ● Cleaning ● Assets < $20,000 ● Computer repairs ● Shop supplies ● Product replacement Had these expenses not been incurred, the business would have made a profit in the 2016-17 financial year. You intend to return to profit in the 2017-18 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 section 35-1 | 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 income year in question where your business activity is affected by special circumstances outside your control. 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. During the 2016-17 financial year your business suffered an event which resulted in it being closed and then temporarily relocated. It is accepted that these events was outside your control and are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that prevented your activity from making a tax profit. The event occurred in the 2016-17 financial year. In the previous months before the event, the business was generating sales of approximately $XX,XXX per month. In the two months following the event, sales had dropped by approximately 50% in the first month and 33% in the second month. You incurred specific expenses as a result of the event. You have provided a profit and loss statement for 2016-17 year to date showing that the business is currently in a net loss position. Had the event not occurred, the profit and loss statement shows that you would have been in a net profit position. You have now re-established the business and are generating sufficient income to produce a profit in the next financial year. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, the Commissioner is satisfied that your activity would have met one of the four tests if it had not been affected by special circumstances. Therefore, the Commissioner will exercise the discretion available in accordance with paragraph 35-55(1)(a) of the ITAA 1997 in relation to your business activity for the 2016-17 financial year.