Private ruling: Non-commercial losses - Commissioner's discretion
Published: September 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

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 losses from your business in your calculation of taxable income for the 2011-12 financial year? | A1: No

Relevant facts and circumstances: You carried on a retail business as a sole trader for a number of years but ceased trading (under that structure) during the relevant financial year. The main business commenced trading under a company structure on 1 July 200X and between that date and 30 June 20YY you continued to sell the remaining stock as a sole trader from premises separate to that of the company. The stock was run down and turnover fell accordingly. Staff numbers also dropped as the business wound down. The last of the stock was realised and/or scrapped in the relevant year.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision: Summary: Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55 of the ITAA 1997 that it would be unreasonable to defer the loss. Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise the first arm of this discretion where certain special circumstances apply. '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. No exhaustive definition of 'special circumstances' is given in the legislation. In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. TR 2007/6 states at paragraph 47: …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. Having special circumstances in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that the special circumstances were out of your control and prevented you from passing a test. In your situation, you satisfy the income requirement (that is, your taxable income, excluding your business losses, does not exceed $250,000) and you do not come under any of the exceptions in section 35-10 of the ITAA 1997. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The establishment of a new structure or new direction for a business is a factor that may relate to any business and is not considered to be special circumstances as described by the taxation legislation or TR 2007/6. The circumstances were not considered 'special' within the meaning of paragraph 35-55(1)(a) of the ITAA 1997, nor were the circumstances outside your control. The circumstances occurred as a result of your actions which, in a legal and practical sense, were within your control. You had the power to make the decisions regarding your stock and it was your choice to sell the remaining stock over a two-year period, rather than alternative winding up decisions (such as transferring the stock to the company), that prevented you from meeting a test. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 to allow you to apply your business losses against your assessable income in the relevant financial year.