Private ruling: non-commercial losses - Commissioner's discretion
Published: April 2013
Ruling period: Year ended 30 June 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 primary production activity in your calculation of taxable income for the relevant financial year? | A1: No.

Relevant facts and circumstances: Your income for non-commercial loss purposes for the relevant financial year exceeds $250,000. You commenced your primary production activity in a partnership. In the relevant financial year special circumstances outside your control were as follows: · drought conditions - residual and lingering impact; · damaged from insects · disease in both crop and cattle; · difficulties in loading export ships-competing with coal export leaving local markets oversupplied with feed grains and consequently prices fell; Under the above impact the partnership delivered an accounting profit significantly less than the budget forecast. You own approximately one quarter of the partnership. Your distribution from the partnership for the relevant financial year was less than your deductions outside the partnership.

Relevant legislative provisions: 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, disease, insects and export problems 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. Your partnership, but for the special circumstances, was projected to make a profit however your share would be less than your expenses outside the partnership with the majority of the expenses unaffected by the special circumstances. As a result the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 cannot be exercised as a profit would not have been made but for the special circumstances.