Private ruling: Non-commercial losses - Cattle breeding
Date of advice: 25 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act (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 to 2019-20 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 relevant discretion may be exercised for the financial 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 • 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 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 53 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. The special circumstances must have affected the business activity. In application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 due to the fact that your stud animal was not able to facilitate the expected natural increase in your livestock size for several years. The question that must be addressed is whether these situation described is considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary. It was within your control to make the decision to wait until you had a new stud animal raised from your livestock, rather than to investigate and use other means of inseminating your livestock through other available means in the interim years. Whilst we do not dispute that this may have been a sound business decision, it was still a decision that was within your control and was a major contributing factor in your inability to make a tax profit in those years. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.

Relevant facts: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | You carry on a primary production business. | You submit that you were affected by special circumstances in the relevant financial year, in that your prized stud animal was found to be infertile. | This animal had been used successfully at stud in the past, producing offspring after being put with your other livestock. | However, after two years of failed breeding, where the stud animal did not sire any offspring, you requested a vet check on their fertility, the results of which found them to have become infertile. | You did not have 'Loss of Use' insurance coverage on the stud animal, protecting you in the event of the potential infertility of your stud animal, as you submit this is not common practice amongst smaller primary production enterprises. | When you discovered your stud animal was infertile in 20XX, you made the decision to raise a new stud animal from your existing livestock. This stud animal is now of age to be used for stud purposes and you have put them in with your livestock for the first time this season. | You have submitted evidence to substantiate your claim. | You intend to be in a tax profit position in the 2019-20 financial year.