Private ruling: Non-Commercial Losses - Commissioners Discretion
Date of advice: 24 February 2016
Published: April 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

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 business activity in your calculation of taxable income for the 2014-15 income year? | A1: Yes

Relevant facts and circumstances: You began your primary production business activity in 20xx. In the 20xx-yy and 20yy-xx the business activity was affected by pests and diseases. The pest activity led to the majority of your crop being destroyed and, therefore, unsellable. In order to combat this issue in 20xx you purchased a greenhouse and have purchased additional greenhouses in the 20xx-yy financial year. This has led to the diseases and pests infesting your previous crops becoming controllable. The business activity produced income of less than $20,000 in the 20xx-yy and 20xx-yy financial years. Actual income and projections for the 20xx-yy financial year show that you should produce income of over $20,000. Your income for non-commercial loss purposes in the 20xx-yy financial year was more than $40,000 but less than $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - section 35-10 | Income Tax Assessment Act 1997 - section 35-30 | Income Tax Assessment Act 1997 - section 35-35 | Income Tax Assessment Act 1997 - section 35-40 | Income Tax Assessment Act 1997 - section 35-45 | Income Tax Assessment Act 1997 - section 35-55

Reasons for decision: Summary: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: • the exception in subsection 35-10(4) of the ITAA 1997 applies; or • you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or • if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your assessable income from sources not related to this activity was more than $40,000 in the 20xx-yy financial year. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply. Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2014-15 financial year. | Detailed Reasoning - The Commissioner's discretion - special circumstances: Where the income requirement is satisfied, the Commissioner's discretion, under paragraph 35-55(1)(a) of the ITAA 1997, can be exercised where a business activity is affected by special circumstances, outside the control of the operators, such that it is unable to satisfy any of the tests. Taxation Ruling TR 2007/6 sets out 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. Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all business within a particular industry. 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. In your case, your crop was severely affected by pests and disease. It is accepted that these conditions were outside your control and are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that prevented your activities from meeting one of the tests. The pests and diseases prevented you from selling a large portion of your crop as it was damaged and of unsellable quality. This left only a smaller portion that you could sell. It wasn't until the last few months of the 20xx-yy and the first months of the 20xx-yy financial years that you were able to take corrective action and get the disease and pests under control so that you could sell all of the crops harvested. The income figures for first two quarters of the 20xx-yy financial year show that your crops produced income in excess of $10,000. Therefore, it is reasonable to conclude that, had it not been for the diseases and pests in your crops in the 20yy-xx financial year, you would have produced income in excess of $20,000. The Commissioner is satisfied that your activities would have met one of the four tests if it had not been affected by special circumstances. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your primary production activities for the 2014-15 financial year.