Private ruling: Non-commercial losses and the Commissioner's discretion for special circumstances
Date of advice: 13 June 2016
Published: October 2017
Ruling period: 1 July 2016 to 30 June 2020
Date scheme commenced: January 200X

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 2016-17 2019-20 financial years? | A1: Yes

Relevant facts and circumstances: You will not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the 2016-17 to 2019-20 financial years. You carry on a business on three properties. The business is primarily concerned with agricultural services. You commenced business operations in the 20XX-XX financial year. You submit that you were affected by special circumstances in the XX-XX to 20XX-XX financial years. You expect that you will continue to be affected by these special circumstances in the 20XX-XX to 20XX-XX financial years. You have submitted the following evidence to substantiate your claim: ● Relevant news article ● Bureau of Meteorology Rainfall Percentile Ranking You submit that the special circumstances impacted on the profitability of your business in the following ways: ● Decreased number of livestock turned over in the past four years, well below the carrying capacity of the three properties ● You were required to acquire another property to act as a fattening block for stock being marketed. The property is located outside of the drought affected area. ● You invested funds in water reticulation facilities to improve the effectiveness and efficiency of water conservation and distributions on the properties ● You diversified the business operations to combat the effects of drought by harvesting feral farm animals to supplement income. This has resulted in needing to complete fencing repairs where required to ensure the properties are capable of containing the farm animals. The decrease in income from running fewer livestock, combined with the increase in deductible expenditure on investment in water facilities, fencing repairs and holding costs of acquiring the additional property will result in a loss in the 20XX-XX to 20XX-XX financial years. But for the special circumstances, your business would be expected to produce profits for the 20XX-XX to 20XX-XX financial years. You intend to return to profit of $XX in the 20XX-XX financial year.

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), and | 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. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that: ● but for the special circumstances, you would have made a tax profit ● you have met one of the four tests or would have but for special circumstances. Consequently the Commissioner will exercise his discretion in the 20XX-XX to 20XX-XX financial years.