Private ruling: Commissioner's discretion
Published: June 2012
Ruling period: 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: For the year ended 30 June 2011, will the Commissioner exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) for special circumstances to allow you to deduct your business charter loss? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You purchased a charter boat, funded with loan. The Small Business Tax Break (SBTB) was a key determinant in your decision. You planned that the tax refund from the SBTB would be used to pay down your loan. You entered into a boat charter management arrangement with a charter operator. There was a delay in building the boat, which, under the contract, was to be in operation by 30 June 2010. The boat was delivered some months after that. As a result, you missed income from the peak season, which is July to September. Your initial forecast profit for your first five years of operation was $10,000 per annum, comprising of $120,000 gross income, $20,000 in depreciation and $25,000 in interest. However, your current personal forecast is lower for the year ending 30 June 2012, with a $5,000 loss from $95,000 in gross sales, $6,000 in depreciation and $30,00 in interest, including $6,000, $9,000 and $9,000 in forecast monthly income for January, February and March respectively. For the period September 2010 to 30 June 2011, your actual boat charter gross income was $40,000, Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) was $20,000 and net tax loss was $20,000. Your Business Activity Statements (BAS) for the 9 months to 31 March 2012 show receipt of $50,000 in actual gross income, compared to your forecast of $70,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-55

Reasons for decision: Summary: Taxation Ruling TR 2007/6 is about non-commercial business losses and the Commissioner's discretion. Paragraph 13A of TR 2007/6 provides, for those individuals who do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997, special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals, the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income year(s) in question where: (a) but for the special circumstances, the business activity would have made a tax profit; and (b) the activity passes at least one of the four tests or, but for the special circumstances, would have passed at least one of the four tests. In your case, the Commissioner considers your boat charter activity was not affected by special circumstances in such a way to cause it to not make a tax profit, for the following reasons: (1). As stated in your ruling application, the charter boat industry is very susceptible to weather, which is why the boat charter season in your area is generally regarded as being from June to October/November. It follows we do not regard tropical cyclones occurring in December, January and February to be special circumstances in relation to the boat charter industry. To the contrary, we consider such tropical cyclones to be ordinary circumstances, which is why many boat owners moor their boats in more southern waters for safe keeping during the northern tropical cyclone season. (2) Contrary to the grounds in your ruling application, we consider the Global Financial Crisis (GFC) to not be a special circumstance because you purchased your charter boat after the GFC had occurred and with knowledge of the persisting economic ramifications of the GFC. Paragraph 44 of TR 2007/6, quoting the court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 78 ALR 307; (1988) 8 AAR 245, states the core of the idea of special circumstances is that there is something unusual or different to take the matter out of the ordinary course. At the time you purchased your charter boat, the GFC was the ordinary course of economic conditions rather than a special circumstance. (3) Your private ruling application states the key determinant in making the decision to purchase your charter boat was the SBTB. The SBTB was an initiative specifically implemented to stimulate economic activity during the significant economic downturn of the GFC. The impression gained is you made the conscious decision to purchase a business asset using a government initiative that would generally only be implemented during periods of dire economic conditions. Again, the impression gained is you chose to purchase your charter boat with knowledge of the prevailing economic conditions. (4) As was a common occurrence for taxpayers who used the SBTB as key determinant in making the decision to purchase a charter boat for delivery prior to 30 June 2010, so they could receive a tax refund soon after 30 June 2010 to assist them in financing their investment, your charter boat was not delivered prior to 30 June 2010. Whilst you did not mention this specifically as a special circumstance in your application, this is also not a special circumstance. Instead, for many new charter boat owners, it was a common hope to receive a quick financial advantage, which it seems the boat construction industry could not fulfil. (5) As demonstrated by your actual charter boat earnings for the years ending 30 June 2011 and 2012, your initial financial projections appear to be a highly optimistic best case scenario and not realistic in respect to a world economy still affected by the GFC. The initial forecast gross income of $120,000 is from an estimated 175 days of hire, which is full capacity from June to November or 72% capacity from April to November. In your BAS for the quarter ended 30 September 2011, your gross sales were $30,000 or an average of $10,000 per month. In April 2011, your gross sales were $10,000, which resulted in a net profit of $1,200, your highest monthly profit for that financial year. Thus, if you earned a similar profit for the quarter ended 30 September 2010, this would have not prevented your $20,000 loss for the year ended 30 June 2011. To conclude, the Commissioner does not consider that, but for the special circumstances, your boat charter activity would have made a tax profit. It follows the Commissioner will not exercise his discretion under section 35-55 of the ITAA 1997 in this case.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.