Private ruling: non-commercial losses
Published: January 2014

Ruling: 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 property development activity in your calculation of taxable income for the 2011-12 to 2013-14 financial years? | Answer: No | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | 1 July 2009 | You did not make a profit within the commercially viable period for your industry and you were not affected by special circumstances. | You fail the income requirement. | Income Tax Assessment Act 1997 Section 35-10 Income Tax Assessment Act 1997 Subsection 35-10(2E) Income Tax Assessment Act 1997 Section 35-55 Income Tax Assessment Act 1997 Section 35-55(1) | 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 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 (first limb) | The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity. | 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. For those individuals who do not satisfy the income requirement, special circumstances are generally those which have materially affected the business activity, causing it to make a loss. | 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. | 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 your 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. | Nature of the activity (second limb) | The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. | For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. | Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied. | Paragraphs 84 and 85 of Taxation Ruling TR 2007/6 state: | The Commissioner needs to be satisfied that there is an objective expectation that the business activity will satisfy a test or produce a tax profit in some future income year falling within a period that is commercially viable for the industry concerned. If the business activity is not expected to satisfy a test or produce a tax profit within this period then the discretion will not be exercised. | The objective expectation does not have to be held by, or attributed to, a particular person. The Commissioner need only be satisfied that, based on the available supporting material, an objective expectation exists.