Private ruling: Non-commercial business losses - Commissioner's discretion
Published: December 2014
Ruling period: Year ended 30 June 2014
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 any losses from your business activity in your calculation of taxable income for the 2013-14 financial year? | A1: No.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business (the business) through a partnership structure. The business commenced on a part-time basis with the intention of growing the clientele, while you supported the business with income from full-time salaried employment. One partner has since ceased external employment and the business is now operating on a full time basis. One partner has successfully operated a similar business some years ago and has every expectation this business will obtain the same levels. Initial costs were incurred in establishing a stock of consumable supplies and miscellaneous items. In addition fixed costs such as rent will not increase yet revenue from full time operation will increase. The projected increase in revenue is directly attributable to the hours which you are now able to apply to the business. Some further capital purchases for equipment required to operate the business will be incurred in the coming 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) | Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision: Summary: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you satisfy the income requirement and you pass one of the four tests • the exceptions apply, or • the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. '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. For individuals who satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have: • made a tax profit or • passed one of the four tests. Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's 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. 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 2013-14 financial year. You submit that the special circumstances impacted on the profitability of your business in the following ways: • the business commenced on a part-time basis with the intention of growing the clientele, while you supported the business with income from full-time salaried employment • the business revenue is directly attributable to the hours which you apply to the business, and • initial costs were incurred in establishing a stock of consumable supplies and miscellaneous tools. The question that must be addressed is whether the situations described above are considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. The circumstances of the activity are not unusual or out of the ordinary, or outside the control of the business activity. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2013-14 financial year.