Private ruling: Non-commercial losses
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

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 the calculation of your taxable income for the 2012-13 financial year? | A1: No. | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activity in the calculation of your taxable income for the 2012-13 financial year? | A2: No.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · the application for private ruling, and · the documents provided with the application for private ruling. You and your spouse satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. You and your spouse operate a business in partnership. You and your spouse commenced business operations in the relevant financial year. In the relevant financial year the business generated income. According to the business plan, the business expected to generate income of less than $20,000 in the relevant financial year. During the relevant financial year, there was a number of issues with the business assets. This meant the business was unable to operate for some periods of the year. The business did not meet any of the four non-commercial loss tests in the relevant financial year. It is expected that the business will meet the assessable income test in the subsequent financial year.

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

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 · the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the year of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. | Detailed Reasoning - Special circumstances: The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss. 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 this case, the business assets had a number of issues which resulted in them not being able to operate for some periods of the year. You have stated that as a result the business was not able to produce $20,000 of assessable income. However, the business plan for the relevant financial year projected income of less than $20,000. It is expected that the issues would occur in the normal course of conducting your business. We do not consider the issues with the business assets to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. | Detailed Reasoning - Lead time: The relevant discretion may be exercised for the income year in question where: · it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests · there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. This discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. The discretion should not be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or because a client base is being built up. We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Your business was able to generate income in your first financial year in operation. We do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to satisfy one of the tests. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997.