Private ruling: Non commercial losses and the Commissioner's discretion
Published: May 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 2008

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 any losses from your franchise activity in your calculation of taxable income for the 2008-09 financial year? | A1: No.


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

Reasons for decision: Summary: Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss from a business activity carried on by a taxpayer who is an individual unless: (a) their business activity satisfies one of the four tests listed in section 35-10 of the ITAA 1997 (b) the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997 the activity, or (c) the individual comes within the exception to Division 35 which may apply to a primary production or professional arts business. Under the measures, the losses that cannot be offset against other income in the year in which they arise may be carried forward to be offset in a future year when there is a profit from the non-commercial activity (or against other income if certain criteria are satisfied or the Commissioner exercises his discretion). The discretion in section 35-55 of the ITAA 1997 may be exercised for the income year in question where the business activity is affected by special circumstances outside of the control of the operators of the business activity. Such circumstances are specifically defined to include, but are not limited to, drought, flood, bushfire or some other natural disaster. Taxation Ruling TR 2007/6 is about the Commissioner's discretion. It states the discretion is not intended to apply where a business activity makes a loss because of factors which can apply to any business and which do not affect the ability of the activity to satisfy one of the four tests. Rather, the discretion is intended to be available for a commercial business activity that has failed, or objectively is expected to fail for a period of time, to satisfy any of the tests for certain reasons outside the control of the operator. Paragraph 139 of Taxation Ruling TR 2007/6 provides the following example: Andrew started a clock repair business in the 2001 income year. Andrew was new to the region and the industry and had yet to establish his clientele. Andrew had intended to operate his business full time but as his funding was very limited he chose to continue with his part time employment to support himself and only worked on his business activity in his spare time. Andrew's premises are in the back of a small arcade and he only opens for business on weekends while the other shops in the arcade are open every day of the week. The arcade is not in an area that attracts business on weekends. Andrew cannot afford advertising and has so few clients that he is unable to cover his expenses and has made losses each year. Andrew's business has yet to satisfy one of the four tests. Other businesses of this type are able to satisfy a test in the first year of operation. The inability of Andrew's business activity to satisfy any of the four tests is due to his personal business choices as to hours of business, location and advertising, not any inherent characteristics that affect clock repair businesses. Accordingly the requirement of subparagraph 35-55(1)(b)(i) is not met and the Commissioner would not exercise the discretion. In your case, you purchased a business in 2008. However, you ceased the business because you did not have a sufficient turnover to enable you to pay the bills. Your failure to meet the assessable income test was not due to special circumstances outside of your control, such as a natural disaster. In your case, you did not satisfy any of the four tests was because of a downturn in sales or incorrect information provided by the previous owners. Additionally, the exception does not apply to you as your activity is not considered to fall within the definition of a primary production or professional arts business. Your situation is not of the kind for which section 35-55 of the ITAA 1997 was enacted. To conclude, the tax legislation does not permit the Commissioner to exercise his discretion in your case. Your loss will be deferred until a future year where one of the tests is satisfied or the Commissioner grants a discretion.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You and your spouse bought a non-primary production business in 2008. | The previous owners provided you with an amount of daily turnover and stated that the business was operating at a profit. Upon taking over the business, you never achieved the average turnover. | Because you did not achieve the turnover, you struggled to pay your accounts. | You left your full time employment and worked in the shop full time. | You decreased the staff and reduced the stock levels. | You changed the name of the business and slightly refurbished the store to help the business survive. You also changed the style of stock to attract a younger customers. | You found someone to rent the premises. | You sold your home to pay creditors of the business. | You satisfy the income requirement; you do not satisfy any of the four tests and the exceptions do not apply.