Private ruling: Non-commercial losses-Commissioner's discretion
Published: July 2013
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 200X

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 activities in your calculation of taxable income for the relevant financial year? | A1: No.

Relevant facts and circumstances: You commenced your primary production activity in 20ZZ. Your income in the relevant financial year for non-commercial loss purposes is over the $250,000 threshold. You are breeding livestock for sale and at the moment are breeding to increase your numbers. You had an animal two years ago that was expected to sell for approximately $V however prior to the sale the animal died. The drought has severely impacted your day to day management of the livestock as fodder and agistment costs have increased. You have not produced a profit since commencing the primary production activity however you expect to be profitable by the 2013-14 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 - section 35-1 | Income Tax Assessment Act 1997 - subsection 35-10(2E) | Income Tax Assessment Act 1997 - subsection 35-55(1) | Income Tax Assessment Act 1997 - paragraph 35-55(1)(a). Detailed reasoning | 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, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. | The relevant discretion may be exercised for the financial 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 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 year 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. | It is accepted in your case that the drought constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. | You have not made a profit since the commencement of your primary production activity in 20ZZ. For the discretion to be exercised you must be able to show that had the special circumstances not occurred your primary production activity would have made a profit. The information supplied for the relevant financial year show that; | · livestock expenditure was less than the previous year | · the expenditure increased however the major expenditure was service fees/ breeding and rental which is considered to be a normal operating expense | · had the animal been sold for $V you would still have shown an overall loss | From the information supplied you have not shown that the special circumstances prevented you from producing a profit for the relevant financial year. | Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial year.