Private ruling: Non-commercial losses
Date of advice: 20 January 2017
Published: June 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) 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 2015-16 financial year? | A1: No | Q2: 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 2015-16 financial year? | A2: No

Relevant facts and circumstances: Your income for non-commercial loss purposes for the financial years 2015-16 is more than $250,000. You are carrying on a business (the activity). The business has residential properties which are leased out to residents for a lump sum amount. When residents leave the lease amount is transferred back to the resident or their estate less amounts deducted for “deferred management fees” and other fees. The business has been profitable in the past years. Its main source of income is the re-leasing of units when residents leave. During the 2015 year there were xx such releasing events. During the 2016 year there only xx releasing events, the result of this was a significant decrease in in income for 2015-16 financial year, while operating expenses remained constant.

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)(c)

Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2015-16 financial year. Commercially viable period discretion The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period for the industry. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base. In your case, you have been conducting your business activity for a number of years and it has been profitable in the past, therefore the commercially viable period for the activity has passed and the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the 2015-16 financial year. Special circumstances discretion 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 on the exercise of the 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. 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 when carrying on a business activity and affect all businesses within a particular industry. You have stated that the reduced releasing of residential properties resulted in a significant decrease in income in the 2015-16 financial year. While these circumstances were outside of your control, they are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Fluctuations in the turnover of residential properties would be a normal part of a business activity of this kind. Therefore, the Commissioner is unable to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2015-16 financial year.