Private ruling: Non-commercial losses and the Commissioner's discretion for special circumstances
Date of advice: 14 July 2017
Published: November 2017
Ruling period: Year ended 30 June 20XX
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 primary production business activity in your calculation of taxable income for the 20XX-XX financial year? | A1: Yes

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business in a partnership. You commenced business operations in the 20XX-XX financial year. You previously had people in a managerial position to take care of the business. This arrangement was in place as you live interstate and are unable to attend to the needs of the everyday business activities. You submit that you were affected by special circumstances in the 20XX-XX financial year. You submit that the special circumstances impacted on the profitability of your business in the following ways: ● Money was fraudulently taken from your business. This had a flow on affect into future financial years. ● You were required to replace items which were also stolen. ● Additional maintenance costs were required for maintenance work that was neglected. An external management agency has now been engaged to manage the business. You have submitted Fraud Report Form to substantiate your claim: You have advised that but for the special circumstances, your business would have produced a profit of $XX. You intend to return a profit in the 20XX-XX financial year.

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: The Commissioner has not considered whether or not your rental unit activity satisfies the requirements of carrying on a business. 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. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that: ● but for the special circumstances, you would have made a tax profit ● you have met one of the four tests or would have but for special circumstances. Consequently the Commissioner will exercise his discretion in the 20XX-XX financial year.