Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 7 December 2015
Published: February 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
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 primary production activity in your calculation of taxable income for the 20YY-ZZand 20ZZ-AA financial years? | A1: Yes.

Relevant facts and circumstances: You commenced your mixed farming activity in July 20XX. The farming activity was severely damaged by severe weather in the 20YY-ZZ financial year. Most of the trees on the farm were damaged, and significant structural damage was suffered by the farming plant and equipment. In order to salvage the trees, extensive work was carried out replanting and then pruning the trees. Many of the trees seem to be recovering well. The trauma caused by the damage to the trees and then the replanting and pruning program has significantly impacted on the annual harvest. The annual harvest of your trees for the 20YY-ZZ and 20ZZ-AA financial years, have been greatly impacted by the weather pattern. That, and the extra expenses incurred attending to the damaged trees, have resulted in your business activity to make a tax loss for the 20YY-ZZ and 20ZZ-AA financial years. After full recovery of your plantation, you are now looking forward to a better than average harvest for the 20AA-BB financial year, and are expected to make a profit.

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 income years, Division 35 of the Income Tax Assessment Act 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 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 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(s) in question where, but for the special circumstances: • your business activity would have made a tax profit, and • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that: • but for the special circumstances, you would have made a tax profit • you have met one of the four tests or would have but for special circumstances. Consequently the Commissioner will exercise his discretion in the 20YY-ZZ and 20ZZ-AA financial year.