Private ruling: Commissioner's discretion - special circumstances
Published: July 2011
Ruling period: Year ended 30 June 2011
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 real estate related business activities in the calculation of your taxable income for 20XX-11 financial year? | A1: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 Income Tax Assessment Act 1997 - section 35-10 Income Tax Assessment Act 1997 - section 35-30 Income Tax Assessment Act 1997 - section 35-35 Income Tax Assessment Act 1997 - section 35-40 Income Tax Assessment Act 1997 - section 35-45 Income Tax Assessment Act 1997 - section 35-55

Reasons for decision: Summary: 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 activities have 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 and are not expected to until the 2011-12 financial year. The Commissioner's discretion - special circumstances Where the income requirement is satisfied, the Commissioner's discretion, under paragraph 35-55(1)(a) of the ITAA 1997, can be exercised where a business activity is affected by special circumstances, outside the control of the operators, such that it is unable to satisfy any of the tests. Taxation Ruling TR 2007/6 sets out 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. 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 your case, you believe that your business activity would have satisfied the assessable income test had it not been affected by a downturn in the property market, the financial crisis, the reduction in the first home buyer's grant and rising interest rates. Fluctuations in the property market are a normal part of the industry, along with rising interest rates. The reduction in the first home owner's grant and the financial crisis both took place prior to you commencing your business and should have been taken into account in any business plan. While these conditions were outside your control, they are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your activities for the 20XX-11 financial year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You commenced your business activities in 20XX on a full-time basis. | Your income for the 20XX-XX financial year was approximately $XX.XXX. | You believe that your income would have been in excess of $60,000 had it not been affected by a downturn in the property market, the financial crisis, the reduction in the first home buyer's grant and rising interest rates. | Your adjusted taxable income for the 20XX-XX financial year was below $250,000.