Private ruling: Non-commercial loss and the Commissioner's discretion
Date of advice: 26 October 2015
Published: October 2015
Ruling period: Year ended 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 primary production business activity in the calculation of your taxable income for the 2014-15 financial year? | A1: Yes.

Relevant facts and circumstances: You and your spouse started a primary production business (the business) through a partnership entity in the relevant financial year. During the subsequent financial year the business was affected by multiple factors, the primary being well below average rainfall. As a result of the lack of rain the grasses died early and your stock did not pick up weight quick enough to be sold at good prices. You were forced to sell them to feed lots at less than 50% of the normal market rate for healthy stock, which resulted in a loss of business income of $X for the subsequent financial year. Had the business not been affected by the lack of rain, you predict that it would have passed the $20,000 income test. You have provided documents detailing forecasts for your business which show estimated assessable income in excess of $20,000 for 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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the income 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 satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you meeting one of the four tests. Consequently the Commissioner will exercise his discretion in the 2014-15 financial year.