Private ruling: Non-commercial losses Commissioner's discretion
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

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 financial year ended 30 June 2011? | A1: No.

Relevant facts and circumstances: You have met the assessable income test however you do not satisfy subsection 35-10(2E) of the ITAA 1997 as you earned more than $250,000 in the 2010-11 financial year. You operated a commercial retail premises for the 2010-11 financial year. The intention of the business was to make a profit and for long term success so you could decrease the hours worked in your other employment. You seek the Commissioner's discretion to allow the deduction of the incurred business losses as you believe there were special circumstances beyond your control that attributed to the losses. Also these factors also contributed to you not meeting the income requirement. Those special circumstances are: · Floods and a cyclone · Earthquakes · High Australian dollar foreign exchange rate · Economic downturn The shop was only open for a period of 12 months so income details from the business prior to that do not exist. You rely heavily on tourism for your business as the majority of your customers are not local residents but interstate and international visitors. The natural disasters have lead to a significant decrease in tourism to the area which adversely impacted your business. The high Australian dollar exchange rate and economic downturn were other factors beyond your control. This has directly led to fewer visitors from all overseas countries. You had significant ongoing expenses that you could not escape as you were committed to a 12 month lease. You asked your landlord for a temporary reduction in rent to accommodate for the tough economic times. This request was refused. You had employed several strategies to assist in covering these costs. These strategies did not suffice in covering the necessary costs. You did what you could and decided to take on as many extra shifts in your other job to keep afloat. The consequence of this was that you have exceeded the income requirement. The income earned in this particular financial year is not average for you. In the first six months of 2011 (during and immediately after the natural disasters) the average monthly turnover had decreased significantly. Business only started to pick up again after June 2011. You have ceased trading at the end of your lease in Sep 2011 and commenced trading again in another location in May 2012 with a renewed business plan, products to suit all budgets and an in house manager. You have already passed the assessable income test for the 2011-12 financial year and based on this new business plan have confidence that your business will be profitable for years to come and you will be able to decrease your hours working at your other employment.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 subsection 35-55(1)(a)

Reasons for decision: Summary: You have not satisfied the income requirement as your relevant income has exceeded $250,000. Therefore the loss from your activity will not be taken into account in the financial year ended 30 June 2011 unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997. To apply the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity is affected in the relevant year by the special circumstances. Whilst we accept that an economic downturn and exchange rates are not within your control we consider them to be a normal part of industry and not something unexpected. Therefore they are not considered special circumstances as this term is used in paragraph 35-55(1)(a) of the ITAA 1997. Flood and cyclones are weather conditions that are outside your control and therefore it is accepted as special circumstances as this term is used in paragraph 35-55(1)(a) of the ITAA 1997. However, for the Commissioner to exercise the discretion there must be an expectation that a profit would have been made except for the occurrence of the special circumstance. In the 2010-11 financial year the highest income was in the (Oct-Dec 2010) quarter which was before the special circumstances occurred. Extrapolating this figure across the remaining quarters when the special circumstances occurred would have resulted in an income higher than actually achieved. The expenses for the last three quarters of the 2010-11 financial year amounted to much more than the income. This scenario would still produce a loss for the year. In the first quarter (July to September) of the 2011-12 financial year the income generated was the highest amount of income you have recorded since being in business. For comparison, if this amount was achieved in the last three quarters for the 2010-11 financial year it would have produced an income for the 2010-11 financial year that was not greater than the expenses for the year and therefore a profit would still not have been achieved. Therefore in terms of paragraph 35-55(1)(a) of the ITAA 1997, special circumstances outside of your control may have affected your business activity in the financial year ended 30 June 2011. However, they have not affected your business to the extent that a profit would have been made had the special circumstance not occurred. There is no scope to allow the Commissioner's discretion under the special circumstances limb in section 35-55 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.