Private ruling: Commissioner's discretion - special circumstances
Published: August 2011
Ruling period: Year ended 30 June 2010 | Year ending 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise the discretion in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your property development activities in the calculation of your taxable income for the 2009-10 and 2011-12 financial years? | A1: 


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 - Subsection 35-10(2) Income Tax Assessment Act 1997 - Subsection 35-10(2E).

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 2009-10 financial year and you expect this will be the case in the 2011-12 financial year as well. 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 your property development business activities were affected by unexpected market fluctuations caused by the global financial crisis. While these conditions were outside 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 real estate market are expected to occur on a regular basis and would have affected all businesses of this type. Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your activities for the 2009-10 and 2011-12 financial years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You commenced your property development activities in 20XX. | The development consisted of four units that were anticipated to have an average selling price of over $5 million. | Your estimated profit from this development was expected to be over $X,000,000. | When sold, the average price received was $X,000,000. | You believe the effect the global financial crisis had on high end real estate could not be considered normal market fluctuations. | Your actual figures for the 2009-10 financial year show a loss from the activity and your projected figures for the 2011-12 financial year also show a loss is expected from the activity. | The projected figures for the 2011-12 financial year relate to one of the properties that was originally sold but bought back from an unsatisfied purchaser in 2011. | Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this will be the case in the 2011-12 financial year as well.