Private ruling: Non-commercial losses
Date of advice: 18 August 2015
Published: August 2015
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 (ITAA 1997) to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2013-14 financial year? | A1: No.

Relevant facts and circumstances: The arrangement that is the subject of the private 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: • the application for private ruling, and • the documents provided with the application for private ruling. You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. The business is primarily concerned with selling livestock. You commenced business operations in 19X0. The business activity did not make a profit in the last X financial years. You submit that you were affected by special circumstances in the 2013-14 financial year. You intend to return to profit in the 2015-16 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)

Reasons for decision: Summary: For the 2009-10 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. 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 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 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. It is accepted in your case that the disaster 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. The following considerations lead us to believe that had the special circumstances not occurred the business still would have returned a loss: • the business activity did not make a profit in the X financial years prior to the 2013-14 financial year. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.