Private ruling: Commissioner's discretion for non-commercial losses
Date of advice: 15 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

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 2014-15 financial year? | A1: Yes.

Relevant facts and circumstances: You do not satisfy the income requirement as set out in subsection 35-10(2E) of the ITAA 1997. You work full time in a primary production business. Your farming enterprise was substantially de-stocked during the drought. Prior to the drought you ran a number of livestock and this was reduced by almost 2/3rds in 20XX. Young stock was held in a continuing balance between holding and selling at deflated prices. You expected a profit in the relevant financial year but sales of livestock did not meet expectations. The Commissioner exercised their discretion and allowed you to include losses from your business activity in the calculation of taxable income for the relevant years financial years. In the subsequent financial year, your stock has reached a certain capacity and sales are strong. You pass the assessable income, the real property and the other assets test of Division 35 of the ITAA 1997. You project a tax profit in the subsequent 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) and | Income Tax Assessment Act 1997 paragraph 35-55(1)(a).

Reasons for decision: Summary: The relevant discretion may be exercised for the year of income in question where your business activity is affected by special circumstances outside your control. As the exception or a test is not met, you have applied for the Commissioner's discretion to be applied in terms of paragraph 35-55(1)(a) of the ITAA 1997. '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 years in question where, but for the special circumstances: • your business activity would have made a tax profit • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. Having regard to your full circumstances, it is accepted that your business activity continues to be affected by special circumstances outside your control. Further, it is accepted that: • but for the special circumstances, you would have made a tax profit • you have met one of the four tests or would have but for special circumstances. Consequently the Commissioner will exercise his discretion in the relevant financial year.