Private ruling: Special circumstances - non-commercial loss
Date of advice: 20 January 2022
Published: April 2022
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

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 20XX financial year? | A1: No.

Relevant facts and circumstances: You do not meet the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the 20XX income year. You are a partner in a partnership that conducts a business activity of primary production farming. Your business activity has not previously reported a tax profit. During the 20XX financial year, your business activity was impacted as you were unable to visit the property due to state border closure as a result of the COVID19 pandemic. Your business activity was impacted by drought, and a business decision was made to downsize the operations to focus on XXXX farming. Your business activity returned a loss in the XXXX financial year primarily due to XXXX and XXXX expenditure.

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 section 35-30 | Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision: Summary: Taxation Ruling 2007/6 Income tax: non-commercial business losses: Commissioner's discretion ('TR 2007/6') at paragraph 41D stipulates: For individuals who do not satisfy the income requirement, the factors that must be satisfied before deciding whether to exercise the special circumstances limb of the discretion for an income year are that: • the business activity is affected by special circumstances such that it is unable to produce a tax profit; and • the business activity either satisfies at least one of the tests or is affected by special circumstances such that it is unable to satisfy any of the tests; and • the special circumstances affecting the business activity are outside the control of the operators of the business activity. The business activity satisfies the assessable income test under section 35-30 of the ITAA 1995. In your circumstances, you have advised the business activity was impacted by the border closure restrictions imposed as a result of the COVID 19 pandemic. Whilst no exhaustive definition of 'special circumstances' is provided under the ITAA 1997 it is accepted that you were impacted by special circumstances. It is also accepted that the COVID 19 pandemic is special circumstances outside the control of business operations The second aspect to the first factor is that the special circumstances have impacted the business activity such that it is unable to produce a tax profit. You have provided your financial statements which demonstrate that the business activity incurred a loss of $XXXX in the XXXX financial year. The majority of this loss was attributable to a XXXX expense of $XX. You also advised this expenditure was incurred as a result of the border closures, making it impossible for you to attend to the property. You contend that had you been able to attend the farm, this expenditure would only be for $X for ongoing repairs and replacements as required. Given your prior business operations, the decision to purchase was a departure from your previous operations. You have advised that you would not have made the decision to incur this expenditure but for the border lockdowns. Accordingly, it flows on that the existing asset with maintenance and small improvements would have been sufficient had you been able to attend the property. When faced with a decision regarding the asset, you made the decision to purchase new XXXX and XXXX. It was not a requirement of the border lockdowns that this expenditure be incurred, and the outlay is instead treated as an indirect impact of the special circumstances. Whilst the COVID19 pandemic was outside the control of the business operators, the decision to incur extra expenditure was within the control of the operators. The decision to purchase ultimately was a business decision to ease workload and ensure asset safety. The business activity conducted has not reported a tax profit at any time. Accordingly, the Commissioner under paragraph 50A of TR 2007/6 can consider that, where a business activity is carried on by an individual who does not satisfy the income requirement and this activity would have made a loss even if it had not been affected by special circumstances, it is unlikely that it would be considered unreasonable for the loss deferral rules to apply and therefore the Commissioner is unlikely to exercise the discretion. In your circumstances, the loss that has been incurred has a direct link to a business decision made by you. Considering the business activity has not previously reported a tax profit, and the nature of the expenditure that caused the business to make a loss, it would be unreasonable for the loss deferral rules to not apply to your situation. As the discretion has not been exercised, the losses will defer.