Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 8 December 2015
Published: February 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

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 manufacturing business in the calculation of your taxable income for the relevant financial year? | A1: No.

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 have been suffering from disabilities (your condition) for a number of years, which have been an ongoing impediment on your physical functioning. During the relevant financial year you commenced a business as you were unable to be gainfully employed in the open labour market. You have incurred expenses in the business for the relevant financial year. Your condition impedes your physical functioning, and depending on pain severity, potential decline in physical functioning, and medical treatment, will have a direct impact on productivity of your business activity. You do not believe that your business activity will ever pass one of the four tests of commerciality. You have made a loss for the relevant 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) | 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 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, 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. 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. In application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the relevant financial year for the following reason: • your condition impedes your physical functioning, and therefore has a direct impact on the productivity of your business activity. The question that must be addressed is whether the situation described above is considered special circumstances. Whilst your particular circumstance is not listed above, it is accepted that an illness may be considered as special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, as stated above, the special circumstances must be 'sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting your business activity'. Whilst we acknowledge your condition, it began some time before the commencement of your business activity, and therefore it cannot be said that your circumstance was different to circumstances that occur in the normal course of conducting your business activity. As such it is not accepted that your condition constitutes special circumstances in the way this term is used in the legislation. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the year in question.