Private ruling: Non-commercial losses- Commissioner's discretion - special circumstances
Published: December 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

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 losses from your primary production activity in your calculation of taxable income for the year ended 30 June 2014? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-1. | Income Tax Assessment Act 1997 Subsection 35-10(2). | Income Tax Assessment Act 1997 Subsection 35-10(4). | Income Tax Assessment Act 1997 Subsection 35-10(2E). | Income Tax Assessment Act 1997 Section 35-55. | Income Tax Assessment Act 1997 Paragraph 35-55(1)(a).

Reasons for decision: Summary: Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless: • the exception in subsection 35-10(4) of the ITAA 1997 applies, • you satisfy subsection 35-10(2E) of the ITAA 1997 and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or • the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. In your case, you are carrying on a business of primary production, however, the exception in subsection 35-10(4) of the ITAA 1997 has no application. You do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 for the 2013-14 income year. Therefore as you do not satisfy the income test and the exception does not apply, the losses from your activities will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997 that it would be unreasonable to defer the loss. | Detailed Reasoning - Paragraph 35-55(1)(a) of the ITAA 1997: Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner may exercise a discretion where certain special circumstances apply. Special circumstances in this context are those outside the control of the business operator, and include drought, flood, bushfire or some other natural disaster. 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. As highlighted in Taxation Ruling TR 2007/6, ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all business within a particular industry. Information provided shows that your farm area received lower than average rainfall in the growing period. Such rainfall amounts are not regarded as ordinary fluctuations in your area. The unfavourable rainfall conditions were outside your control and it is accepted as a special circumstance as this term is used in paragraph 35-55(1)(a) of the ITAA 1997. In your case it is accepted that the weather conditions significantly affected your business operations. As a result you had a significantly lower crop yield. The losses from your business activities are directly related to the severe weather conditions. Your activity has previously obtained significantly higher income. The Commissioner is satisfied that your farming activity would have made a profit in the year ended 30 June 2014 had it not been for the severe weather conditions. Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 has been granted for the 2013-14 income year. The Commissioner is satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your business activity. This means that the loss for your business activity can be taken into account in calculating your taxable income for that year.

Relevant facts: The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | • your Private Ruling application and attachments | • rainfall data for your area. | You conduct a primary production activity on a property. | You run the farm full-time with one full-time farmhand. | You received well below average rainfall during the crop growing season in this year. | Your yields were greatly reduced in this year which led to reduced income. Your expenses increased as you had to acquire produce due to failed crops. | You have not satisfied the income requirement as your adjusted taxable income has exceeded $250,000.