Private ruling: Non-commercial losses - Commissioner's discretion - special circumstances
Date of advice: 15 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2004

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 the partnership X business activity in your calculation of taxable income for the 20WW-XX to 20YY-ZZ income years? | A1: Yes | Q2: Will the Commissioner exercise his discretion in paragraph 35-55(1)( c) of the ITAA 1997 to allow you to include any losses from the partnership Y business activity in your calculation of taxable income for the 20WW-XX to 20YY-ZZ income years? | A2: No | Q3: 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 the partnership Y business activity in your calculation of taxable income for the 20WW-XX income year? | A3: Yes | Q4: 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 the partnership Y business activity in your calculation of taxable income for the 20XX-YY income year? | A4: No


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) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: Based on the information provided, the Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 to allow the losses from the X activity in the 20WW/XX to the 20YY/ZZ income years. The Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 to allow the losses from the Y activity in the 20WW/XX income year. The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 to allow the losses from the Y activity in the 20WW/1YYincome year. | Detailed Reasoning - Detailed reasoning: For the 20AA-BB 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, 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 you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. There are two possible discretions that the Commissioner can exercise. When a business activity is started there may be a lead time before a profit can be made due to something in the nature of the activity, such as the delay in deriving assessable income for the period it takes for a crop to grow. After this initial period the lead time discretion is not available. In your case you have two distinct and separate business activities for the purpose of the non-commercial losses legislation (X and Y). Both the activities are long established businesses and do not have the lead time discretion available to them in these years under consideration. The expansion of an established business does not bring a new lead time discretion into consideration for the non-commercial losses purposes. The potentially relevant discretion that may be exercised in your circumstances for both the activities in the financial years in question is the special circumstances discretion. This is where special circumstances outside your control have impacted on your business activity and prevented you from making a profit in a particular year. '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 do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances: • your business activity would have made a tax profit; and • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. We need to consider the application of the special circumstances to each of the business activities in their own right and also the impact of any special circumstances in each financial year to see if the Commissioner's discretion may be applicable. | Detailed Reasoning - X business activity: You have argued that your X business activity has been impacted by drought in the 20WW/XX to 20YY/ZZ income years. You have provided various figures showing the low rainfall in the area, livestock accounts showing the impact on calving rates and sales, and profit and loss statements showing the impact on income and expenses. It is accepted in your case that the drought constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. You have provided details of your average sales income. Actual sales have been below this figure in the 20WW/XX and 20XX/YY income years, giving a reduced income. In the 20YY/ZZ income year there were forced disposal sales due to the drought. The portion of the gross trading profit applicable to the forced sales will not be included as assessable income of the activity in this year, in line with the forced disposal income tax provisions. The annual fodder expenses during this period have been very high. There have been extra expenses associated with contract labour and freight that are directly associated with the drought conditions. The combination of the reduced income and increased expenses due to the drought is the reason why there are losses in each of these years. Therefore, the Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 to allow the losses from this X activity to be offset against your other income in the 20WW/XX to 20YY/ZZ income years. | Detailed Reasoning - Y business activity: You have requested the Commissioner's discretion for the Y activity for the 20WW/XX and 20XX/YY income years. For the Commissioner to exercise a discretion under the NCL special circumstances provisions, you have to be able to show that a profit was not obtained in a year due to the financial impact of the special circumstances. There can be an effect on both income/yield and expenses, but these items need to be clearly identified to reach the correct conclusion. You have identified the drought and disease as potential special circumstances that may have a financial impact in the 20WW/XX and 20XX/YY income years. We accept these two events as special circumstances outside of your control. From the farm performance reports that you have provided the farm average yield. You have provided a detailed explanation of the extra expenses and reduced income that have occurred in these years. This evidence indicates that the loss in the 20WW/XX income year is due to the special circumstances, but the loss in the 20XX/YY year is for other reasons. We accept the above explanation of the financial impact of the special circumstances. From these figures it can be seen that the loss in the 20WW/XX income year is due to the impact of the special circumstances on reducing income and increasing expenses which has created the loss in this year. The loss in the 20XX/YY income year is ultimately due to other reasons. Therefore, the Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 20WW/XX income year but not for the 20XX/YY income year in relation to the Y activity.

Relevant facts: You conducted two separate business activities through a partnership. | These business activities have been carried on for a number of years. | You provided copies of Profit & Loss statements for a number of years. | You provided information that outlined the production for each of the activities for a number of years. | You provided details of the impact that the events like drought and disease had on your business activities. | You had losses in each business activity in each of the years being considered. | Your taxable income for non-commercial losses purposes was in excess of $250,000 for each of the years.