Private ruling: Non-commercial losses - Commissioner's discretion
Published: January 2014
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion in subsection 35-55(1) 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 2010-11 and 2011-12 financial years? | A1: No.

Relevant facts and circumstances: During the 2010-11 financial year, you commenced a business activity as a sole trader marketing and selling construction products under a sales contract agreement with the distributor. Under the agreement, you earn commissions based on the number of sales you broker for the distributor. The commission is 75% of gross sales less cost of goods and a 5% administration fee. You engaged the services of a contractor with experience in the construction industry to assist with the business and to perform on-site measuring and quoting. The contactor charges you on a time and materials basis. Your product sales totalled over $20,000 in 2010-11 and 2011-12 financial years. Your sales commissions for the 2010-11 financial year were less than $10,000 and your contractor expenses were more than $20,000, producing an overall loss. Your sales commissions for the 2011-12 financial year were less than $17,000 and your contractor expenses were approximately $20,000, producing an overall loss. You state that the reason you were unable to meet the assessable income test in the 2010-11 and 2011-12 financial years was due to the cyclical downturn in the construction industry.

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

Reasons for decision: Detailed Reasoning - The Commissioner's discretion - special circumstances: Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: · the business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and · the special circumstances affecting the business activity are outside the control of the business activity. Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioners 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) 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. Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. 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 and affect all business within a particular industry. In your case, that the reason you were unable to meet the assessable income test in the 2010-11 and 2011-12 financial years was due to the cyclical downturn in the construction industry. Fluctuations in the construction industry occur on a regular or recurrent basis and affect all business within the industry. This is not considered to be 'special circumstances' within the meaning of paragraph 35-55(1)(a) of the ITAA 1997. Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 and 2011-12 financial years. | Detailed Reasoning - The Commissioner's discretion - lead time: Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can also be exercised where: · the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and · there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year. Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this Ruling. The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests. This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. In your case, the income produced from your business activity consists of sales commissions and not the product sales themselves. As there is nothing in nature of your business that prevents it from producing assessable income quite soon after it has commenced, the inability of your business activity to satisfy the assessable income test was not due to lead time either, as set out in paragraph 35-55(1)(b) of the ITAA 1997.