Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 10 March 2016
Published: May 2016
Ruling period: Year ended 30 June 20WW | Year ended 30 June 20XX
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 (ITAA 1997) to allow you to include any losses from your farming business (the activity) in your calculation of taxable income for the 20VV-WW and 20WW-XX financial year? | A1: Yes

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You acquired a license from a government department to collect and farm product A. The license allowed you to farm product A at a certain location. Collection limitations placed on you by a government department threatened the viability of your activity, which meant that you would need to focus on the overseas market, as you can obtain a much higher price internationally than domestically. To export product A, the product must have collected under a current permit. To export product A, relevant legislation states that the Minister must be satisfied that the export will not be detrimental to, or contribute to trade which is detrimental to, the survival or recovery of the species, or a relevant ecosystem. This is known as a Non-detriment Finding (NDF). Obtaining an NDF is a part of the process. When you commenced your collection of product A, there was a current operation in place with the relevant government department. However the permit expired and a new one was not issued until some time later. This means that there was a period of time where there was no operation for the government department, under which you were collecting product A for farming. At that time a government department advised you that product A would be allowed to be exported once certain criteria were met. However you have since been advised that product A collected during the period that there was no operation, can never be sold internationally. You have grown adequate stock for your activity to be self-sustaining. You have provided projected profit and loss information, based on actual expenses and projected sales had you been able to sell your pieces overseas. You advised that the activity would be profitable during the 20VV-WW and 20WW-XX financial years had you been able to sell on the international market. Further, the activity would have made more than $20,000 in assessable income in those 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), and | 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 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 • 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. Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion 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 54 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. However the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. The question that must be addressed is whether the circumstances you described are considered special circumstances as identified in TR 2007/6. In your case, you were granted a license to collect product A from a particular area, and were advised that you could sell internationally after you adhered to certain conditions. When you began collecting and farming product A, it was taken under a current permit. However, as the government department let their permit lapse, product A and its progeny collected during a period of time can never be sold internationally. Had you been able to sell the product internationally, your activity would have made a tax profit and passed one of the four tests for commerciality for the 20VV-WW and 20WW-XX financial years. Having regard to your full circumstances, it is accepted that the government department's failure to ensure that they were covered by a current permit is considered special circumstances outside your control, which prevented your activity from making a tax profit and passing one of the four tests for commerciality. Therefore, the Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial years.