Private ruling: Non-commercial losses and the Commissioner's discretion
Published: October 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2002

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) or paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your animal activity in the calculation of your taxable income for the 2012-2013 financial year? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c). | 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 meet the income requirement and you pass one of the four tests · the exceptions apply · 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 do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. | Detailed Reasoning - Commercially viable period: The relevant discretion may be exercised for the income year in question where: · it is in the nature of your business activity that there will be a period before a tax profit can be produced · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. In your case, you have had a animal business since the 2002-03 financial year. The nature of your activity predominantly has continued to be animal breeding and this original activity has now changed to that of breeding specific animals. While the activity changed, it is considered that the activity commenced in the 2002-03 financial year. · Breeding of the specific animals is merely a deviation to, or specialisation of your original business activity. The lead time commences at the beginning of the original activity Therefore, the Commissioner can not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business for the 2012-13 financial year as the commercially viable period has expired. | Detailed Reasoning - Special circumstances: The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. For those individuals who do not satisfy the income requirement special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where: · but for the special circumstances, the 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. You advise your activities have been affected by drought for a few years. However, from the information you have provided, the amount of the extra expenses you incurred for feed is not excessive and while they contributed to the loss, it is clear that you would not have made a profit in the 2012-13 financial year without these additional expenses. Furthermore, your decision not to sell more animal because of the reduced market prices is not considered to be out of your control. In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the 2012-13 financial year.

Relevant facts: You have operated an animal farm business since 20XX. | When you commenced the business, you had ordinary animal. However, you have now started to specialise in the specific breed. | You are building up your herd and want to buy your own property in the next few years. | Due to the decrease in value of animals during the 2012-13 financial year and poor market conditions, you sold less animals during the year than you would normally have done. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2012-13 financial year.