Private ruling: non-commercial losses
Published: April 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
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 2013-14 financial years? | A1: Yes.

Relevant facts and circumstances: You do not satisfy the income requirement as set out in subsection 35-10(2E) of the ITAA 1997. You work full time in a primary production business. Your farming enterprise was substantially de-stocked during the drought. During the last five years sales have been reduced whilst the re-stocking process has been undertaken. You pass the assessable income, the real property and the other assets test of Division 35 of the ITAA 1997. You project an expected tax profit in the 2014-15 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: The relevant discretion may be exercised for the year of income 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 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. It is accepted in your case that the drought may constitute 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. The special circumstances resulted in you having to drastically reduce your stock. When circumstances commenced to improve your profitability relied on the expansion of your stock. When special circumstances occur and the ability to produce a profit is impaired and there is a requirement to sell off of stock, a period of rebuilding that stock is considered essential. However the period in which that stock can be rebuilt and losses deducted is determined by what the industry considers to be the commercially viable period (CVP). In your case the CVP of three to four years is that industry's expectation. In your situation due to special circumstances your stock was severely reduced however by rebuilding you expect a tax profit in the 2104-15 financial year. When special circumstances impact on the normal CVP paragraph 98 TR 2007/6 allows at least a one year tolerance on that period. Therefore paragraph 98 of TR 2007/6 provides that if a tax profit is made in the 2014-15 financial year the discretion may be exercised. Therefore the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 is exercised for the relevant financial years.