Private ruling: Non-commercial losses
Date of advice: 8 September 2016
Published: October 2016
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ending 30 June 20XX | Year ending 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 the calculation of your taxable income for the relevant financial years? | A1: Yes.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You conduct a primary production business in partnership. X trees were destroyed and Y heavily damaged resulting in largely reduced yields. You entered into a contract with a nursery to propagate and supply Z new trees, supplying a substantial deposit. The trees were never delivered and the nursery went into receivership and deregistered with the deposit not recovered. You attempted to secure other trees from different nurseries; however due to the fact that all farmers in the area had also been affected by the circumstances, nursery stocks were unable to meet local demand. You were then able to secure an order of Y new trees which were delivered in 20XX. The new trees were immature and will take approximately three years to start producing any yield and five years to produce full yield. In the 20XX-XX and 20XX-XX financial years you passed the $20,000 assessable income test of Division 35 of the ITAA 1997. You intend to pass the $20,000 assessable income test in the 2018-19 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. Your trading history shows that you passed the $20,000 assessable income test prior to the event. It follows that the Commissioner accepts that if not for the event, you would have continued to pass this test. Consequently the Commissioner will exercise his discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the relevant financial years.