Private ruling: Non-commercial losses
Published: December 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: February 2002

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 2013-14 financial year? | A1: No

Relevant facts and circumstances: You have assessable income over $250,000. You carry on a business in partnership with has previously made a profit. Due to seasonal conditions in the dairy industry during the 20xx/xx and into the 20xx/xx financial year the amount of work available in the district reduced significantly causing you to look for work elsewhere. You were able to secure fly-in fly-out work as an employee in late 20xx/xx and through 20xx/xx. As a result of this work the business of the partnership decreased significantly. A loss was created due to the payment of accounts outstanding from the 20xx/xx financial year (you account on a cash basis). The loss incurred for the 20xx/xx financial year for the plumbing business was $x. Your income was only over $250,000 due to eligible termination payment received in relation to the fly-in fly-out work. In the 20xx/xx year the level of income generated from the business is increasing with the level of fly-in fly-out work decreasing. It is expected that the business will return to profit as the level of work increases.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 35-10 | 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 income 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. Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity, including drought, bushfire and other natural disasters. However the list is not meant to be exhaustive. There are a range of other circumstances which may be considered as special. 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 years in question where, but for the special circumstances: • your business activity would have made a tax profit; and • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. Paragraph 47 of Taxation Ruling TR 2007/6 explains that to qualify as special circumstances the circumstances must go beyond the normal or expected fluctuations in business, weather or market conditions. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity as well as trading downturns and risks associated with running a business will not be considered to be special circumstances. The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524, Tamberlin J quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1: 'An expression such as "special circumstances" is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.' It can be seen that to determine what is 'special circumstances', we need to look at the context in which the phrase is used. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. The operators of the business activity must also show that the special circumstances were outside their control. The concept of control was discussed in Secretary, Department of Employment, Education and Youth Affairs v. Ferguson (1997) 76 FCR 426; (1997) 48 ALD 593; (1997) 147 ALR 295 for the purposes of subsection 45(6) of the Employment Services Act 1994 . At 76 FCR 438; 48 ALD 603; 147 ALR 306, Mansfield J said: 'The expression in s45(6)(a) requires that the main reason for the failure was something that the person had within that person's control. The concept of "control" in that context is one of fact, but I think it is intended to mean something which the person could have done something about.' | Detailed Reasoning - Application to your circumstances: In your case, you received an eligible termination payment. Receiving this eligible termination payment did not affect your plumbing business, causing it to make a loss. Instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. We do not accept that the economic downturn in the regions is what caused your plumbing business activity to make a loss but rather the personal choice to undertake fly-in fly-out work to the detriment of your plumbing business activity. This choice was within your control and consequently will not satisfy the definition of special circumstances under paragraph 35-55(1)(a) of the ITAA 1997. Even if the Commissioner erred in this regard we do not consider that the economic downturn would amount to special circumstances. Whilst we accept that economic downturns are not within your control we consider them to be normal risks to businesses. They affect all businesses within an area or sector and are not something unexpected and therefore are not special circumstances within the meaning of 55(1)(a) of the ITAA 1997. The Commissioner does not consider that your business was prevented from making a profit by special circumstances. While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.