Private ruling: Non-commercial losses
Published: April 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2012

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 2012-13 to 2014-15 financial years? | A1: Yes.

Relevant facts and circumstances: You carry on a primary production business which you commenced in 20XX. The property forecast profits based on existing industry contracts. In 20XX, soon after purchase, a government restriction was imposed on the industry and a supply assurance system was introduced resulting in many markets to be lost. The value of your stock dropped considerably to a point you believe to be uncommercial. You began to sell down the stock. You plan to restock with different stock for a different market. Drought conditions existed in your area in the relevant years. It will take some time to re-establish the appropriate type and number of stock that ultimately produce positive cash flows. You expect to make a tax 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 the discretion. In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. Taxation Ruling TR 2007/6 paragraph 53 provides examples of natural disasters and paragraph 54 provides that special circumstances are not necessarily restricted to natural disasters. 53. Paragraph 35-55(1)(a) refers to 'special circumstances outside the control of the operators 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. 54. However, the use of the word 'including' indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. 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. In 20XX you commenced business and in the same year your market ceased to exist. You accepted the fact that your market would not recover in the short term and embarked on a new business plan. You planned sell down your now much less valued stock to concentrate on different stock. Your business purchasing power was affected by the de-valuing and sale of your stock and you lack the funds to immediately purchase sufficient stock to show a profit in the 20YY to the 20ZZ financial years. Paragraph 51 of Taxation Ruling TR 2007/6 acknowledges that in some cases the business activity may still be within the lead time for the industry and because of the nature of the activity would therefore have failed to satisfy a test or produce a tax profit even if the special circumstances had not occurred. In such cases the special circumstances may extend the time within which that particular business activity could objectively be expected to pass a test, and the Commissioner could exercise the discretion under paragraph 35-55(1)(a). In your circumstances when you commenced business based on a valuation you expected a profit within the first year of operation. However special circumstances combined to prevent this happening. You re-structured your farming operation by restocking with different stock for a different market to cope with the result of the special circumstances. The special circumstances directly resulted in an increase in debt affecting your ability to immediately re-stock your property with new income producing stock. Therefore it is considered that special circumstances prevent you from making a profit in the 20YY to 20ZZ financial years and consequently the Commissioner will exercise the discretion for those years.