Private ruling: The Commissioner's discretion and non-commercial business losses
Date of advice: 14 September 2015
Published: September 2015
Ruling period: n Year ended 30 June 20YY | n Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 20XX-YY financial year? | A1: Yes | Q2: 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 primary production business activity in your calculation of taxable income for the 20YY-ZZ financial year? | A2: Yes

Relevant facts and circumstances: You purchased a property in the 20WW-XX financial year, and operate a primary production business activity. Your business did not earn assessable income during the 20XX-YY financial year as the farm crop was harvested by the previous owner after you purchased the property, as agreed in the sale contract. Shortly after the previous owners sold and vacated the property, critical farming equipment was stolen. This was reported to police in the 20YY-ZZ financial year. Once it was established that the stolen equipment were not going to be returned, you ordered new equipment from the sole operator in town. Due to delivery delays and the busy time of year, the equipment was not able to be installed and was not operational in time for the 20YY-ZZ financial year harvest. You have had an independent party evaluate the impact of not being able to use the equipment before the harvest. Had you been able use the equipment the increase in crop yields would have resulted in the business passing the $20,000 assessable income test. You anticipate that you will make more than $20,000 in assessable income in the 2015-16 financial year. During the 20XX-YY and 20YY-ZZ financial years your other income for non-commercial loss purposes was more than $40,000 but less than $250,000.

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), and | Income Tax Assessment Act 1997 paragraph 35-55(1)(b).

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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. 20XX-YY financial year Paragraph 35-55(1)(b) of the ITAA 1997 states that the lead time discretion may be exercised for the income year in question where: • it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests • there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. As the 20XX-YY crop was harvested by the previous owner as agreed in the sale contract, your business did not earn assessable income during that year. However as you farm an annual crop, it is accepted that it is in the nature of your business activity that it requires a lead time of one year before income is generated and before it can be expected to pass one of the four tests. Further there is an objective expectation your business activity would have produced a tax profit or meet one of the four tests within this commercially viable period. Consequently the Commissioner will exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 20XX-YY financial year. 20YY-ZZ financial year During the commercially viable period critical farming equipment was stolen, which significantly impacted on the yield of your crop for the 20YY-ZZ financial year. Paragraph 35-55(1)(a) of the ITAA 1997 states that a discretion may be exercised for income years where a business activity has been affected by special circumstances outside of their control. For individuals who satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have: • made a tax profit or • 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 54 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. However the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. Having regard to your full circumstances, it is accepted that the theft of the farming equipment and the delays in installing the new equipment are considered special circumstances outside of your control, and have prevented you from meeting one of the four tests or making a tax profit. Therefore, the Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 20YY-ZZ financial year.