Private ruling: Non-commercial losses- Commissioner's Discretion: Special Circumstances
Date of advice: 20 March 2017
Published: August 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 year ended 30 June 2016? | A1: Yes.

Relevant facts and circumstances: You conduct a XXX farming business in a relevant Australian State or Territory in a partnership. The region that your business operates in has been suffering a severe drought for the past few years. As a result of the drought, the business relies heavily on irrigation water from a river and its tributaries using the Water Access Licences (WAL's). These WAL's are held by the individuals of the partnership, but are used exclusively by the partnership. During the 2016 income year, you both participated in the Sustainable Rural Water Use and Infrastructure Program (SRWUIP). Under this program portions of a WAL are sold back to the relevant government on the condition that the proceeds are utilised by the licence holder to improve water efficiency in their operation, which will greatly increase their chances of sustaining profits in future droughts. The sale of the WAL's has triggered a capital gains tax (CGT) event which has caused you individually to exceed the $250,000 income test for non-commercial loss purposes. The business will make a profit in the 2017 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(1), | Income Tax Assessment Act 1997 paragraph 35-55(1) (a) and | Income Tax Assessment Act 1997 subsection 35-10(2E).

Reasons for decision: Summary: For the 2009-10 and following income years there have been changes to the non-commercial losses legislation to limit the circumstances where business losses can be offset against other income. The introduction of the income requirement test means that individuals with an adjusted taxable income for non-commercial loss purposes in excess of $250,000 for that year will not get access to the four tests. To be able to claim your losses in that year you have to be granted the Commissioner's discretion under section 35-55 of the Income Tax Assessment Act (ITAA) 1997 or meet one of the exclusions. The Commissioner will exercise the discretion under paragraph 35-55 (1) (a) of the ITAA 1997 where it is accepted that special circumstances in the sense in which this term is used in Division 35 of the ITAA 1997 applies. Where the Commissioner is satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to an activity any loss for your activity can be taken into account in calculating your taxable income for the relevant year. In your case you do not meet any of the exclusions and you have not satisfied the income requirement as your relevant income has exceeded $250,000 in the 2016 year. Therefore the loss from your activity will not be taken into account in the year ended 30 June 2016 unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997. To apply the discretion in paragraph 35-55(1) (a) of the ITAA 1997, the Commissioner should be satisfied that the business activity is affected in the relevant year by the special circumstances. The XXX farm production has been affected by the drought and as a result of this your business expenses have increased due to purchasing additional water conservation measures. Due to this significant impact on your farm, the business was unable to return a profit as a result of the impact of the drought in the year ended 30 June 2016. In your case, the Commissioner is satisfied that your XXX farming activity would have made a profit in the year ended 30 June 2016 had it not been affected by drought. Consequently the Commissioner will grant a discretion under paragraph 35-55(1) (a) of the ITAA 1997 to allow you to offset your losses from XXX farming against your other income.