Private ruling: Non-commercial losses - Commissioner's discretion - special circumstances
Published: May 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 1990

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2012/13 and 2013/14 financial years? | A1: No


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 paragraph 35-55(1)(a)

Reasons for decision: Summary: For the 2009-10 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 • 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 possible relevant discretion that may be exercised for the financial years in question is where your business activity is affected by special circumstances outside your control and this has prevented you from making a profit and or passing one of the tests. '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. The impact of the special circumstances may affect the business for a number of years after the event. 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 • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. | Detailed Reasoning - Carrying on a business: It is accepted that you are carrying on a business in these years. You have continued on the normal operation of the business and made improvements to try and overcome the restraints caused by the weather conditions. | Detailed Reasoning - Special circumstances: You have argued that the special circumstances that have affected your business are drought and also a fluctuation in market prices. It is accepted that drought can be special circumstances, but the normal market fluctuation in market prices is not considered special circumstances. There were prolonged drought conditions from 2002 to 2010 calendar years which have impacted on your business activity. The impact of the drought is that it limits the carrying capacity of the property and therefore the ability to turn off stock for sale in those years. Another impact was that it affected your plans to improve pastures. The impact can be seen through the variation in the number of sales and the number of purchases of stock to fatten over this period of time. Sales and purchases have varied over this period. Your business appears to be mainly one of buying and fattening, but there is also a small amount of breeding with natural increase varying over the years. Drought is accepted as special circumstances, but it is difficult to see that there is still an effect from the earlier drought on this business activity in the 2012/13 and 2013/14 income years, that would cause it to fail to make a profit. The numbers being sold appear to be in line with what would be expected from the property based on previous forecasts for when a profit could be made. The losses are quite substantial for a business of this size and do not appear to be caused solely by the ongoing effect of drought alone. The discretion will be exercised where it can be shown that the special circumstances stopped you from making a profit in a particular year. So there needs to be special circumstances, and this has to cause the failure to make a profit. We will consider the potential to make a profit in these years to see if this second component for the exercise of a discretion is met. You have argued that there are extra expenses in relation to improvements that have been made to the property to try and drought proof it and these should be taken into account as extra expenses directly attributable to the drought. | Detailed Reasoning - Prevention of profit: To be able to exercise the discretion it has to be shown that special circumstances (drought) have prevented the business from making a profit in the years ended 30 June 2013 and 2014. You have provided a schedule with regards to the major expenses that you consider have been incurred as a result of the ongoing drought. The expenses are for capital allowance in relation to plant, repairs and maintenance and one third of the labour expenses. You have stated that these expenses are mainly in relation to improvements to the property to try and drought proof it and it is because these expenses that a profit has not been achievable. An analysis of these figures indicates that a profit would not be made in the 2012/13 and 2013/4 years even if the full amount of these expenses were taken out. We do not agree that the full amounts should be taken out as there would be some expenses of this nature incurred in any year. There is no conclusive evidence provided to show that the ongoing effects of drought has prevented the business activity from making a profit in the 2012/13 and 2013/14 income years. On this basis a discretion under paragraph 35-55(1)(a) cannot be exercised.

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 received | • The attached statement in support of the application for private ruling | • The e-mail dated in response to the request for further information | • Information from the previous private ruling request | • Information from prior year income tax returns | You have requested the Commissioner's discretion under the NCL rules. A special circumstances NCL discretion was previously granted for earlier income years. | You commenced the business activity with one property and progressively increased in size and volume throughout a ten year period. | The business is a primary production activity. | With the increase in size there has been the need to invest more heavily in equipment and infrastructure to cope with extra volume, which resulted in much greater expenditure and infrastructure costs. | Prolonged drought conditions existed between 2002 and 2009 calendar years, which limited the ability to carry the requisite stock levels. The operation returned continuing trading losses between the years 2005 to 2012. | With improvement in sales, a levelling of expenditures and a diminution of capital allowance deductions, moderate profits were expected in the 2013/14 income year | There are no borrowings outstanding in respect of the farm property. | There have been substantial trading losses in the 2012/13 and income years. You expect to make a profit in the year ended 30 June 2015. | A significant cost has been contract labour. | You devote between 15 and 20 hours per week to the enterprise. A locally based overseer helps manage the property on a part time basis and keeps you informed, when you are not physically present. There are no other paid employees. | Figures have been presented for the livestock accounts and profit and loss statements for a number of years. | ATO view documents: Taxation Ruling TR 2001/14 Taxation Ruling TR 2007/6.