Private ruling: Non Commercial Losses - Income requirement - Commissioner's discretion
Published: September 2013
Ruling period: Year ended 30 June 2013.
Date scheme commenced: 1 July 2012.

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 your loss from your business activity in your calculation of taxable income for the relevant year? | A1: No.

Relevant facts and circumstances: During the relevant year you were an employee. You carried on a business for the whole of the relevant financial year. In all previous financial years you satisfied the income requirement according to section 35-10 of the ITAA 1997. That is, the sum of the following was less than $250,000: · Taxable income; · Total reportable fringe benefits; · Reportable superannuation contributions; and · Total net investment losses. During the relevant year you were made redundant by your employer and you received a termination payment just before the end of the relevant year. The taxable component of the termination payment was quite large. You had expected the termination payment to made early in the subsequent year, however it was paid late in the relevant year. As a result of you receiving the termination payment earlier than expected, this meant that you did not satisfy the income requirement for the relevant year. You have included a letter from your employer regarding the early payment of the termination payment. This letter from your employer is to be read with and form part of the facts for the purpose of this private binding ruling. You believe that you would have been able to claim your losses from your business if you had not received the termination payment in the relevant year.

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) and | Income Tax Assessment Act 1997 paragraph 35-55(1)(a).

Reasons for decision: Summary: The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business in your calculation of taxable income for the relevant year. | Detailed Reasoning - Detailed reasoning: For the 2009-10 and later income years, Division 35 of ITAA 1997 applies to defer a non commercial loss from a business activity unless: · the taxpayer meets the income requirement in subsection 35-10(2E) of the ITAA 1997 and passes one of the four tests outlined in paragraph 35-10(1)(a) of the ITAA 1997; · the Commissioner exercises his discretion set out in section 35-55 of the ITAA 1997 for the business activity in that year; or · the business activity is a primary production business, or a professional arts business, and the taxpayer's assessable income for that year (except any net capital gain gains) from other sources that do not relate to that activity is less than $40,000. Broadly, the income requirement outlined in subsection 35-10(2E) of the ITAA 1997 is satisfied if the taxpayer's taxable income (with certain adjustments) is less than $250,000. As your taxable income for the purposes of subsection 35-10(2E) of the ITAA 1997 exceeds $250,000, you will not meet the income requirement. It is accepted that the reason for exceeding $250,000 was because of a once-off termination payment from employer. Accordingly, in order for you to be able to deduct losses incurred from your business from your other assessable income, the Commissioner would need to exercise his discretion in section 35-55 of the ITAA 1997. Otherwise your business losses are subject to the deferral rule. The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred. The relevant discretion contained in paragraph 35-5591)(a) of the ITAA 1997 may be exercised for the financial year in question where the Commissioner is satisfied that: · an event has occurred that would be considered special circumstances (in terms of the relevant legislation) for your business activity and this event was outside your control; and · the impact of these special circumstances prevented your business activity from making a tax profit in the year you are seeking the discretion. '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. Taxation Ruling TR 2007/6 Income tax: Division 35 - non-commercial losses (TR 2007/6), paragraph 14, states the special circumstances must be outside the control of the operator of the business. Natural disasters are considered special circumstances. In the case of other events, failure for no adequate reason to adopt practices commonly used in industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator. Paragraph 47 of TR 2007/6 states that ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. 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 relevant year on the basis that you received a once off termination payment resulting in you not satisfying the income requirement. Your receipt of a termination payment is not considered a special circumstance that affected the profitability of your business. The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. You are therefore required to defer your loss made in the relevant year.