Private ruling: Non-commercial losses and the Commissioner's discretion
Published: July 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2009

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 primary production activity in your calculation of taxable income for the 2012-13 financial year? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-10 | Income Tax Assessment Act 1997 Subsection 35-10(2E) | Income Tax Assessment Act 1997 Subsection 35-55(1) | 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 carried on by a taxpayer who is an individual, unless: · the individual's business activity satisfies one of the four tests and the income requirement is also satisfied; · the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997; or · the individual comes within the Exception contained in subsection 35-10(4) of the ITAA 1997. You have satisfied the income requirement as the relevant income does not exceed $250,000. The activity has not satisfied any of the four tests and the exception in subsection 35-10(4) of the ITAA 1997 does not apply. Losses made from the activity in this year are therefore subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable for this to occur. The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where: · but for the special circumstances, the 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. You advise your activity was affected by the floods in 2011. However, you have stated that your income in the 2012-13 financial year will be at normal levels. While we accept that the floods have affected your activity and caused you to delay the expenditure on repairs and modifications to your yards, the loss you incur in the 2012-13 financial year can not be attributed to the floods. In view of the above, the Commissioner's discretion in respect of special circumstances will not be exercised for the 2012-13 financial year. Therefore, you must defer the loss to a future year where the loss can be claimed against a profit from your business activity.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You and a partner purchased a property in after 30 June 2007. | You have spent the first few years improving the property and doing preliminary work. | You purchased animals in after 1 January 2010 and you consider that this is when the business commenced. | You provided year to date figures showing that you made a loss for the 2011-12 financial year. | Your income was more than normal in the 2011-12 financial year because of an early sale. | You expect your sales to be back to normal in the 2012-13 financial year. | You have provided a budget for the 2012-13 year which shows that you will produce a loss of approximately $X. | You will incur approximately $Y to repair the yards in after 30 June 2012. | You agreed on a final design for the modified yards and a final quote in late 2011 from a reputable local company; however, due to a heavy backlog of work caused in part by the unusually wet weather, the company cannot now begin work until late 2012. | You did not include an amount for the yard repairs in your budget for the 2011-12 financial year. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income will be more than $250,000 in the 2011-12 financial year.