Private ruling: Commissioner’s discretion for non-commercial losses
Date of advice: 1 May 2019
Published: June 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the Commissioner exercise the discretion to allow you to include any losses from your primary production business in the calculation of your taxable income for the 2017-18 financial year? | A1: Having considered your circumstances and the relevant factors the Commissioner has granted his discretion. It is accepted that your business activity was affected by special circumstances outside your control which caused you to make a loss. Further information on non-commercial losses can be found by searching 'QC 33774' on ato.gov.au

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997). You carry on a primary production business, which commenced in 20XX. You lease two properties at two different locations on which you conduct your business operations “Property 1” and “Property 2”. You submit that you were affected by special circumstances, which were conditions affecting the areas where you conducted your business operations (along with the immediate surrounding areas) in the 2017-18 financial year. You have passed one of the four commerciality tests outlined in Division 35 of the ITAA 1997 (the assessable income test) in the 2017-18 financial year. You have submitted the following evidence to substantiate your claim: ● Various reports from local government authorities covering the relevant periods, which confirm that the area where you conduct your business operations (Property 1 and Property 2) were affected by the special circumstances. ● You have provided a background history of events, regarding how the drought conditions had affected your business leading up to the 2017-18 financial year: ● Your business operation first became affected by conditions in the 2015-16 financial year. ● During the 2015-16 financial year, as a result of the conditions you were forced to buy fodder to hand feed your livestock, and to sell as many head as you could at a reduced price, as the cost of daily feeding was beyond the scope of your business viability. ● As the conditions continued and worsened throughout the 2016-17 financial year, you were also forced to sell even more livestock for the best price you could achieve, in order to reduce feeding costs. Also, the remaining livestock were freighted and sent to other areas where feed was still available, but at substantially higher costs. You submit that the special circumstances impacted your business in the following ways: ● Following on from the abovementioned events that occurred prior to the 2017-18 financial year, from late 2017 the flow on effects of the conditions meant that you had to start reducing numbers of livestock, and by mid- 2018 you were down to a very small number of livestock on Property 1, where you would normally have a much higher numbers. ● You still had to feed the remaining livestock, in order for their survival. ● Property 1 has a few dams, all of which have been dry since early 2018. ● You reduced the numbers of livestock at Property 1 in two ways, firstly by selling, and also by sending the remaining livestock to Property 2 in early 2018, which initially had a good water supply, however as it is small in size, there were restrictions on the numbers of livestock that could be sent to that property. Eventually the conditions also affected property 2, whereby you also had to buy in feed in order for the livestock to survive on that property, and you also incurred increasing freight costs to move the livestock (as you were also forced to move and sell livestock located at Property 2 a reduced price). ● Overall you have lost a significant number of livestock due to the conditions, as even with hand feeding, the ongoing stress and pressure associated with the conditions was too great for many livestock to survive. The projected income and expenditure report you supplied for the 2018-19 financial year indicates that your business will not make profit in that financial year, however you expect to satisfy the NCL income requirement in the 2018-19 financial year, and you also expect to satisfy one of the four commerciality tests outlined in Division 35 of the ITAA 1997 (the assessable income test) in the 2018-19 financial year.

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)