Private ruling: Non-commercial losses
Published: June 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 October 199X

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2011-12 financial years? | 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 operate a business. You commenced business operations in the 1990's. You submit that you were affected by special circumstances in the 2010-11 to 2012-13 financial year. In the 2010-11 financial year you made the decision to close the business temporarily to undertake a complete and major refurbishment. The renovations are now complete and you are ready to recommence trading. You advised that your activities have been affected by the tight labour market, new establishments opening in close proximity to your business, high lease costs and the duration of the lease and the redevelopment of the surrounding shopping precinct. You made a loss in the 2010-11 financial year which you submit has much to do with: You made losses in the 2009-10 and 2008-09 financial years.

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 · 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 2010-11 to 2011-12 financial years. You advised that your activities have been affected by the tight labour market, new establishments opening in close proximity to your business, high lease costs and the duration of the lease and the redevelopment of the surrounding shopping precinct. It is considered that the opening of competitors, leasing costs and the recruitment of staff are ordinary market conditions that affect all businesses within your industry, and are circumstances that might be reasonably expected to occur when carrying on a business and do not fall into the category of special circumstances. In most instances upgrades to surrounding infrastructure of a general and brief nature would likewise not be considered to be special circumstances. On the other hand, works of an extensive nature for a prolonged period of time may be considered special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. From the information you have provided you have not shown that the redevelopment works prevented you from making a taxable profit. You incurred significant losses in the 2009-10 and 2008-09 financial years prior to the works taking place. We would expect that had the council works been the sole reason for business returning a loss the business would have been profitable in the years preceding the upgrade. Therefore the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 to 2011-12 financial years as you have not proven that the road works prevented you from making a taxable profit.

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