Private ruling: Non-commercial loss discretion
Date of advice: 14 May 2026
Published: 27 July 2026
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

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 relevant financial year? | A1: No.

Relevant facts and circumstances: Background and business activity You conduct a primary production business involving livestock farming in a specified region. The business commenced on a specified date following the initial purchase of livestock in that month. Since that time, the activity has been carried on continuously and operates in a commercial and business-like manner. You maintain appropriate accounting and operational records in relation to the activity, including livestock trading statements and stock records. You have provided profit and loss statement for the relevant income years showing reduction in losses over the years. Other income and non-commercial loss threshold During the relevant income year, you derived income from sources other than livestock farming, including employment and investment income. Your taxable income for that year exceeded $XX. Factors contributing to the business loss You incurred a net tax loss from the livestock farming activity in the relevant income year. Under typical seasonal and operating conditions, it is expected that additional livestock sales would have occurred during the relevant income year. To date, the business has not generated a taxable profit in any income year. Expenditure has primarily been directed towards repairing and maintaining existing farm infrastructure and land, including fencing, water systems, and pasture restoration. Most of these repairs have now been completed. Since commencement, the livestock farming activity has been in a development and growth phase, consistent with similar enterprises in the region. This has involved establishing and retaining the herd, as well as ongoing investment in fencing, water infrastructure, and pasture development to improve carrying capacity and long-term productivity. Industry characteristics and operating conditions Livestock farming operations in the region are subject to seasonal variability and cyclical profitability, with outcomes influenced by climatic conditions, pasture availability, herd development, and the timing of livestock sales. Losses are common during adverse or transitional seasons, with profitability typically returning as conditions improve. It also requires capital-intensive establishment and recovery phases, all of which impact the timing of profitability. Prospect of future profitability You have provided projected profit and loss statements for future years, indicating that the business is expected to return to profitability within X years. The projections reflect a period of herd retention and rebuilding, with younger livestock being retained rather than sold prematurely. Under normal production cycles in the region, livestock typically require a defined period to reach saleable weight. Accordingly, significant income from livestock sales is not expected until these animals complete approximately X years of growth. The weather-related damage that led to increased repair costs in the relevant income year is considered temporary, and these costs are expected to return to normal levels in future years.

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 section 35-55 | Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision: Summary: For the 20YY-YY 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 • an exception under subsection 35-10(4) applies (for example, the activity is a primary production or professional arts business and your assessable income from other sources is less than $40,000), or • the Commissioner exercises their discretion. In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses, exceeds $250,000) and you do not come under any of the exceptions in section 35-10(4). 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 (but not limited to) 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. Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling: Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity, to the extent that the loss has been caused by them. In your case, while your livestock farming activity was impacted by seasonal variability and a significant weather event during the relevant income year, the Commissioner will not exercise the discretion for the following reasons: 1. Losses are consistent with the long-term development phase of the activity 2. Since commencement, the business has never produced a taxable profit. Losses incurred in the relevant income year are consistent with prior years and reflect the ongoing herd establishment, retention strategy and infrastructure development typical of a growing livestock enterprise, rather than losses attributable solely to the relevant income year weather event. 3. Weather impacts did not solely cause the loss 4. While the weather event in the relevant income year increased repair and maintenance expenditure, the overall loss also arose from broader factors, including herd retention, production timelines, operating cost structure and the absence of significant livestock sales. As such, it cannot be concluded that the business would have made a profit or satisfied a non-commercial loss test but for the weather event. 5. Future profitability does not justify discretion for the relevant year 6. Although projections indicate a return to profitability in the future income year, paragraph 35-55(1)(a) requires the discretion to be justified in the year the loss is incurred. An expectation of future profit, of itself, is insufficient to warrant the exercise of discretion for the relevant income year. Your losses incurred in the relevant income year arose from conditions that are ordinary, recurrent and inherent to livestock farming in the specified region and from the ongoing development phase of the business. As the requirements for the exercise of discretion under paragraph 35-55(1)(a) are not satisfied, the loss from the business activity cannot be included in the calculation of your taxable income for that year and should be deferred under Division 35 of the ITAA 1997.