Private ruling: Non-commercial losses- Commissioner's discretion: special circumstances
Date of advice: 22 March 2017
Published: August 2017
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
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 your calculation of taxable income for the years ended 30 June 20YY and 30 June 20ZZ? | A1: Yes

Relevant facts and circumstances: You are a partner in a share farm situation where you grow various grains and vegetables on a property. You own 100% of the land, and the farm is run by your business partner, with the sale of grain being the main source of income. You receive XX% of the cropping revenue, and pay for some utilities. The district that your farm is located in has been in drought throughout the 20YY and 20ZZ years, which has prevented the grain from growing. As a result of this, there was no grain to harvest in both financial years and therefore there were no sales. You have provided drought reports from the Bureau of Meteorology and a media release from the Minister of Agriculture to support the existence of this drought. If the region was not in drought, your sales would have been approximately $65,000 for both the 20YY and 20ZZ years. Expenses were still incurred to maintain the farm. It is unknown when the farm will begin to sell the grain again due to the impact of the current drought situation. Your income for non-commercial loss purposes is more than $250,000 for the 20YY financial year. You expect that it will also be more than $250,000 for the 20ZZ financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(1) | Income Tax Assessment Act 1997 paragraph 35-55(1) (a) | Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision: Summary: For the 2009-10 and following income years there have been changes to the non-commercial losses legislation to limit the circumstances where business losses can be offset against other income. The introduction of the income requirement test means that individuals with an adjusted taxable income for non-commercial loss purposes in excess of $250,000 for that year will not get access to the four tests. To be able to claim your losses in that year you have to be granted the Commissioner's discretion under section 35-55 of the Income Tax Assessment Act (ITAA) 1997 or meet one of the exclusions. The Commissioner will exercise the discretion under paragraph 35-55 (1) (a) of the ITAA 1997 where it is accepted that special circumstances in the sense in which this term is used in Division 35 of the ITAA 1997 applies. Where the Commissioner is satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to an activity any loss for your activity can be taken into account in calculating your taxable income for the relevant year. In your case you do not meet any of the exclusions and you have not satisfied the income requirement as your relevant income has exceeded $250,000 in the 20YY year and is expected to do so in the 20ZZ year also. Therefore the loss from your activity will not be taken into account in the years ended 30 June 20YY and 30 June 20ZZ unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997. To apply the discretion in paragraph 35-55(1) (a) of the ITAA 1997, the Commissioner should be satisfied that the business activity is affected in the relevant year by the special circumstances. Your grain farm production has been affected by the drought and as a result of this you have not been able to harvest any crops. Due to this significant impact on your farm, your assessable income was reduced by the impact of the drought in the years ended 30 June 20YY and 30 June 20ZZ. In the preceding years when your business was not affected by the drought your sales exceeded your expenses The information that you provided from the Bureau of Meteorology and the media release from the Minister of Agriculture and Water Resources confirms that the area around the location of your farm was drought affected. Unfavourable weather conditions leading to drought were outside your control and it is accepted as a special circumstance as this term is used in paragraph 35-55(1) (a) of the ITAA 1997. In your case, the Commissioner is satisfied that your farming activity would have made a profit in the years ended 30 June 20YY and 30 June 20ZZ had it not been affected by drought. Consequently the Commissioner will grant a discretion under paragraph 35-55(1) (a) of the ITAA 1997 to allow you to offset your losses from wheat farming against your other income.