Private ruling: Commissioner's discretion
Published: November 2013
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business in your calculation of taxable income for the 2010-11 and 2011-12 financial years? | A1: No.

Relevant facts and circumstances: You commenced your business in 2011 after being made redundant from your pervious employment. You decided to build the business up from scratch rather than purchase a franchise and commissioned a logo, business cards, an internet profile and attended a course about running a small business. You prepared income and expenditure projections for the 2010-11 and 2011-12 financial years where you anticipated assessable income in excess of $20,000 would be achieved in each year and an overall profit would be made. You did not think it would take long to establish a stable clientele, however, the business was not as successful as planned and you suffered a period of severe depression. Your health improved in the 2011-12 financial year and you re-focused your time on the business. However, you still experienced difficulty establishing a large enough client base to earn greater than $20,000. The business did not satisfy any of the other non-commercial loss tests in the 2010-11 or 2011-12 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - Subsection 35-10(4) | Income Tax Assessment Act 1997 - Subsection 35-30 | Income Tax Assessment Act 1997 - Subsection 35-35 | Income Tax Assessment Act 1997 - Subsection 35-40 | Income Tax Assessment Act 1997 - Subsection 35-45 | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(b)

Reasons for decision: Detailed Reasoning - The Commissioner's discretion - special circumstances: Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: · the business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and · the special circumstances affecting the business activity are outside the control of the business activity. Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioners 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) 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. However, the use of the word 'including' indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. In your case, you have stated that you did not think it would take long to establish a stable clientele, however, the business was not as successful as planned and you suffered a period of severe depression. As stated above, an illness affecting key personnel can, in some cases, constitute special circumstances. However, before the Commissioner can exercise the discretion you must also be able to show that it was the special circumstances that prevented your business activity from passing one of the tests or producing a tax profit. You have stated that even though your health has improved, and you have re-focused your time on the business, you are still experiencing difficulty establishing a large enough client base to earn greater than $20,000. While your severe depression could constitute special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997, when your health did improve you still experienced difficulty establishing a large enough client base to earn greater than $20,000. Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 and 2011-12 financial years. | Detailed Reasoning - The Commissioner's discretion - lead time: Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can also be exercised where: · the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and · there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year. Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this Ruling. The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests. This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. In your case, there is nothing in nature of your business that prevents it from producing assessable income quite soon after it has commenced. Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for the 2010-11 and 2011-12 financial years.