Private ruling: Non-commercial losses - Commissioner's discretion
Published: September 2011
Ruling period: 1 July 2009 to 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to claim the losses from your primary production business activity in the 2009-10 financial year? | A1: No. | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2009-10 financial year? | A2: Yes.



Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 as your income for non-commercial loss purposes is less than $250,000. Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1)(a) or paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable to defer the loss. The 'special circumstances' discretion under paragraph 35-55(1)(a) of the ITAA 1997 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. In your case, you have not provided any evidence that your region experienced drought conditions in the 20XX-XX income year and you state that you delayed selling the cattle in that year until you could get a better price. Having regard to your full circumstances, it is not accepted that your business activity was affected by special circumstances outside your control in the 20XX-XX financial year and that these circumstances prevented you meeting one of the four tests. Consequently the Commissioner will not exercise this discretion in the 20XX-XX year of income. · The 'lead time' discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised for the income year in question where: it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests; and · there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. In your case, when you commenced your business as a sole trader, you acquired approximately XXX pregnant cows for your breeding business in which you planned to sell the offspring at 12-16 months of age. It is accepted that it is in the nature of your activity that there will be a lead time before a profit can be expected or one of the tests passed. It is accepted that meeting a test within 2-3 years of commencing your breeding business will be within a commercially viable period for your industry. The information you have provided demonstrates that there is an objective expectation that your business activity will pass one of the tests (the assessable income test) or will produce a taxation profit by the 20XX-XX income year, within two years of commencing your business. Therefore, the Commissioner's discretion under paragraph 35-55(1)(b) has been granted for the 2009-10 income year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | - the application for private ruling dated X July 20XX | - further information you provided on X September 20XX and XX September 20XX | You commenced a business in July 20XX of breeding cattle to sell the offspring (weaners) at 12-16 months of age. | The business previously traded in a related trust and has a history of exceeding $20,000 in turnover. | The trust drastically decreased its stocking rates due to drought conditions. The motivating factors were the need for cash flow, the lack of feed available, the cost to buy feed, no end in sight to drought conditions and the grave fear of overstocking in yet another failed spring. | The farm was in an officially declared drought area and you were receiving Exceptional Circumstances Relief payments due to the drought conditions. | The stock you acquired from the trust on 1 July 20XX when you commenced as a sole trader was the remaining depleted number of breeding cows (approximately XXX pregnant females and 2 bulls) | In the 20XX-XX financial year (your first year in business as a sole trader) sales were less than $20,000 due to a commercial decision by you to wait until you could get a better price for the cattle. | You had approximately 200 cattle on hand as at XX June 20XX, and for the first quarter of the 20XX-XX financial year, sales in excess of $20,000 were achieved. | You state that the business was in the 'herd rebuilding' stage, following destocking by the trust business during the drought. This meant there were fewer young female cattle on hand during this period to use for breeding. | You do not meet the 'real property' test or the 'other assets' test. | Your other income for non-commercial loss purposes is less than $250,000. | Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-1 Income Tax Assessment Act 1997 subsection 35-55(1) Income Tax Assessment Act 1997 paragraph 35-55(1)(a) Income Tax Assessment Act 1997 paragraph 35-55(1)(b) Reasons for decision