Private ruling: Non-commercial losses
Date of advice: 20 April 2017
Published: September 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

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 2015-16 financial years? | 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 commenced a business activity in 20XX. You submit that you were affected by special circumstances in the relevant financial year. You submit that the special circumstances impacted on your business in the following ways: ● you were diagnosed with a medical condition and were hospitalised for a few months, ● you are currently undergoing daily medical treatment for your condition and have been unable to work in the business ● you have had to outsource jobs for the period you were unwell, which increased your business expenses for the relevant financial year. You have provided your profit and loss statement for the relevant financial year which indicates that your business income for the year was below $20,000. For the relevant financial year you did no pass one of the four tests for commerciality.

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 income 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, special circumstances are those which have materially affected their business activity, causing it not to meet any 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, the activity would have passed at least one of the four tests. It is accepted in your case that your medical condition constitutes special circumstances. However, it is not accepted that it was the special circumstances that has prevented you from passing one of the four tests. Further the existence of a reasonable expectation that the business activity would make a tax profit, but for the special circumstances, is not a decisive factor for the purpose of exercising the discretion. Consequently the Commissioner will not exercise his discretion in the relevant financial year.