Private ruling: Non-commercial losses
Date of advice: 18 August 2016
Published: September 2016
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20VV | Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 1997

Ruling: Q1: Will the Commissioner exercise the discretion under 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 20WW-XX to 20YY-ZZ financial years? | A1: Yes.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. The business has been in operation for a period in excess of 15 years. The business has not produced a tax profit in any year since its commencement. You have provided a copy of your business plan which was recently updated. There are a number of facets to your business activity. There is substantial capital invested in the activity and you have completed activities in a regular manner. Your activity has been affected by a number of special circumstances.

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)(c)

Reasons for decision: Summary: For the 20AA-BB and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you meet the income requirement and you pass one of the four tests • the exceptions apply, or • the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. Special circumstances '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 do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances: • your business activity would have made a tax profit • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. The discretion can be exercised in income years after the one in which the special circumstances occurred if the effects of those special circumstances continue to prevent the business activity from satisfying any of the tests in those later income years. However, there may be situations where the special circumstances, because of their continued existence, become the ordinary or usual situation. It would not be appropriate to exercise the discretion once this occurs. | Detailed Reasoning - Application to your circumstances: Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside of your control which have prevented you from making a profit. Consequently the Commissioner will exercise his discretion in the 20WW-XX to 20YY-ZZ financial years.