Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 10 May 2016
Published: June 2016
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: After the withdrawal date of Product Ruling PR 2001-177, which you are considered a class of persons to whom the Ruling applies, are you still considered to be carrying on a business? | A1: Yes. | Q2: 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 (the activity) in the calculation of your taxable income for the relevant financial years? | A2: No. | Q3: After the business was restructured in the relevant financial year, are you considered to be carrying on a business? | A3: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You invested in vinelots in the relevant Project (the Project) in June 20XX. On 19 December 2001 the Commissioner issued Product Ruling PR 2001/177 in respect of the above project. PR 2002/106 replaced the PR 2001/177, on 31 July 2002. However, PR 2001/177 will continue to apply to participants who entered into the project on or before 30 June 2002. The ruling was withdrawn on 30 June 2005. You are considered a class of persons to whom the Ruling applies. The activity has never made a profit or passed one of the four tests of commerciality. You advised that the activity was affected by the following circumstances during the relevant financial years: n the Australian wine industry has suffered from a wine glut (oversupply of wine), which has put downward pressure on the price of wine n management fees and land rent has continued to rise in accordance with the management agreements entered into, and n a restructure of the project resulted in you being given shares in new business structure in return for stock on hand. You would have preferred to continue in the original business structure to hopefully recoup losses incurred. However because of the restructure you were unable to do so. You have accumulated deferred business losses since the withdrawal of the Ruling in 30 June 2005. Your other income for non-commercial loss purposes was more than $40,000 but less than $250,000 for the 2014-15 and 2015-16 financial years.

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), and | Income Tax Assessment Act 1997 Paragraph 35-55(1)(a).

Reasons for decision: Summary: Am I in business? If you have a net loss from a business activity you run as an individual, either as a sole trader or in partnership, the non-commercial loss rules apply. These rules determine whether you can use your business loss to offset income from other sources. In the Ruling, the Commissioner has accepted that the participating growers in the Project are carrying on a business of primary production, if growers acquire the minimum investment of one vinelot. As you acquired vinelots in the Project, you were considered to be carrying on a viticulture and winery business from the year ended 30 June 20XX. Whilst the Ruling was withdrawn and ceased to have effect after 30 June 2005, it continues to apply, in respect of the tax law(s) ruled upon, to all persons who entered into the arrangement prior to its withdrawal. However, this is subject to there being no change in the arrangement, or the person's involvement in the arrangement. As such, on the restructure of the Project in 20YY, your business activity is considered to have ceased. Non-commercial business losses and the Commissioner's discretion For the 2009-10 and later income 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 • the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. '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 satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have: • made a tax profit or • passed one of the four tests. Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling: Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. In application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial year. You submit that the special circumstances impacted on the profitability of your business in the following ways: n the Australian wine industry has suffered from a wine glut (oversupply of wine), which has put downward pressure on the price of wine n management fees and land rent has continued to rise in accordance with the management agreements entered into, and n a restructure of the project resulted in you being given shares in new business structure in return for stock on hand. You would have preferred to continue in the original business structure to hopefully recoup losses incurred. Because of the restructure you were unable to do so. The question that must be addressed is whether the situations described above are considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. The wine glut experienced by the industry and increases in expenses incurred by you are considered standard risks of carrying out a business in your industry, and are not unusual or out of the ordinary. Further, whilst the restructure of the Project was outside your control, it was a business decision and as such, is not considered a special circumstance for the purpose of the Commissioner's discretion. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial years. | Detailed Reasoning - Additional information:: For information on the deductibility of expenses incurred after the business has ceased, please see the attached document: TR 2004/4 - deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities.