If your business activity has been affected by special circumstances outside your control, you can apply for the exercise of the Commissioner's discretion to allow you to claim your loss in that income year if those special circumstances have prevented you passing one of the four tests or from making a tax profit.
Special circumstances are sufficiently different to the circumstances that occur in the normal course of conducting a business activity.
Special circumstances include natural disasters such as drought, flood, bushfire, cyclones, hailstorms and tsunamis.
Other events that may be included as special circumstances, depending on the facts, are:
- oil spills
- chemical spray drifts
- explosions
- disturbances to energy supplies
- government restrictions
- illnesses affecting key personnel.
For the other events, you must show that the special circumstances were outside your control.
Income requirement met
If you meet the income requirement, there are two main factors we consider to decide if it is appropriate for the exercise of the discretion for an income year:
- your business activity is affected by special circumstances such that it is unable to satisfy any of the tests
- the special circumstances affecting your business activity are outside your control.
Example 1
Mark operates a clothing store specialising in the sale and hire of costumes. During the 2015–16 income year, a fire destroyed all of his stock. Mark's business was insured, but due to the specialised nature of the apparel he was unable to resume normal operations for three months. As a result, Mark's business activity had assessable income of less than $20,000 and resulted in a loss that he wants to offset against his other income.
Mark's other income for the 2015–16 income year was $35,000, and Mark met the income requirement for that income year. However, Mark's business activity did not satisfy any of the tests set out in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2015–16 income year. To claim a deduction for the loss, he needed to ask the Commissioner to exercise discretion for that income year.
Mark is able to show that his business activity satisfied the assessable income test in the 2014–15 year and his trading before the fire indicated that he was likely to satisfy this test in the 2015–16 year, if it were not for the fire.
The Commissioner accepts that the business activity would have satisfied the assessable income test if the fire had not occurred. The Commissioner will exercise discretion for the 2015–16 income year as the fire is considered to be a special circumstance outside Mark's control. Mark will be able to offset the loss from his business activity against his other income.
End of exampleIf your business activity would not have satisfied a test even if the special circumstances had not occurred, it is unlikely that the Commissioner would exercise the discretion, and so you would defer your losses.
Income requirement not met
For most individuals who do not satisfy the income requirement it is expected that the business activity will meet one of the four objective tests.
Access to the special circumstances discretion is not limited to those individuals who satisfy the income requirement. Individuals who do not meet the income requirement, but can demonstrate their business is commercial and has been affected by special circumstances, may also apply for the Commissioner's discretion to allow the losses to be claimed in that income year.
For a business activity to be regarded as commercial, at least one of the four objective tests provided in the non-commercial loss rules must be satisfied. If you do not satisfy the income requirement, the factors you must satisfy in deciding whether to apply for the Commissioner's discretion for an income year are all of the following:
- your business activity is affected by special circumstances such that it is unable to produce a tax profit
- your business activity either satisfies at least one of the tests, or is affected by special circumstances such that it is unable to satisfy any of the tests
- the special circumstances affecting your business activity are outside your control.
Example 2
Alister carries on a business of breeding cattle for sale, and has done so for the past 20 years. In prior years this business activity has been very profitable. However, in the 2015–16 income year it was affected by drought, which caused Alister to spend much more than anticipated on fertilizer and seed to maintain the condition of his pastures. The drought also affected the average sale price per head Alister could obtain for his cattle. A large loss was made from the business for the 2015-16 income year.
Alister has other income of $300,000, so he did not meet the income requirement for the 2015–16 income year. Alister's business activity satisfied both the assessable income and profits test for this year. For Alister to claim a deduction for the loss, he needs to ask the Commissioner to exercise his discretion for that income year.
Alister's application shows that special circumstances outside his control – the drought – caused his business activity to make the loss; without those circumstances, a profit would have been made.
The Commissioner accepts the business activity is 'commercial' based on the strong past profitable performance and the fact that the business continues to satisfy the assessable income test and the profits test. The Commissioner concludes that it is unreasonable in these circumstances for the loss to be deferred, and uses the special circumstances discretion. Alister will be able to offset the loss from his business activity against his other income.
End of exampleIf your business activity would have made a loss even if it had not been affected by special circumstances, it is unlikely that it would be considered unreasonable for the loss deferral rules to apply and the Commissioner is unlikely to exercise the discretion.
Example 3
Using Alister's case in Example 2, if his business had not made a profit in recent times and was not reasonably expected to make a profit in the future, the Commissioner would not exercise the special circumstance discretion. Even though Alister's business satisfied the real property test or the other assets test and was affected by drought, it was not because of the drought that Alister would not make a profit. This means it would not in itself, indicate that it was unreasonable for losses from the business to be deferred.
End of exampleThe 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.
Tax profit
A tax profit is where the amount of assessable income from the activity for a year is greater than the sum of the deductions attributable to the business activity for that year.
Outside your control
The special circumstances affecting your business activity must be outside your control.
If you fail for no adequate reason to adopt certain practices commonly used in your industry to prevent or reduce the effects of certain circumstances, such as pests or diseases, this may point to the circumstances not being outside your control.
Similarly, if you acquired a poorly run but promising business activity, it would generally be considered within your control and would not, by itself, constitute special circumstances, even though the actions of the former operator may have been outside your control.
Economic or other market fluctuations that might reasonably be expected to affect a business activity are not unusual or out of the ordinary and, therefore, are not considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. However, substantial, unexpected economic or market fluctuations of a scale not regularly encountered previously may qualify on a case-by-case basis.
Example 4
Oliver has a farming business which produced assessable income of $25,000 from the sale of produce in the 2014–15 income year and satisfied the assessable income test. In the 2015–16 income year the market price of his produce dropped because of lower consumer demand; Oliver's farm income fell to $18,000 and a loss resulted. The fall in market price was within the range of normal fluctuations for this industry. Oliver's business activity did not satisfy any of the tests and the exception for primary production business activities did not apply, as he received at least $40,000 of non-farm income.
In this case, the Commissioner would not exercise the discretion for special circumstances as the reduction in market prices for produce from Oliver's farm is not a special circumstance but a normal business fluctuation. As a result, the loss from Oliver's farming business activity will be deferred.
End of exampleEvidence
Evidence to support your application for the Commissioner's discretion due to special circumstances can include:
- evidence of the event (circumstances)
- why the effect of the event is regarded as special in relation to the ordinary operations of your business activity
- whether, and on what basis, the event can be regarded as unusual or out of the ordinary
- the basis on which your activity would have passed a test or made a tax profit but for the event occurring - that is, what happened differently as a result of the event occurring
- whether the event was the main or only reason for your business activity failing a test or not making a tax profit
- how the event, including the effects of the event on your business activity, was outside your control
- whether your business activity has passed a test or made a tax profit in a previous year
- whether you expect the event to affect your business activity in the future, and if so, to what extent
- any other information or evidence you think should be taken into account in your application.