Private ruling: Non-commercial losses
Date of advice: 29 September 2025
Published: 17 November 2025
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion for non-commercial business losses under Section 35-55 of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: Background X and Y are partners in a partnership, the XY partnership ( the Partnership ). As individuals, they exceed the income requirement of $250,000 under subsection 35-10(2E) for the years ending 30 June 20XX and 30 June 20XX. Each of them meet, or expect to meet, all four commerciality tests as set out in paragraph 35-10(1)(a) during the years 30 June 20XX and 30 June 20XX in relation to the Partnership business, being: • the assessable income test under section 35-30; • the profits test under section 35-35; • the real property test under section 35-40; and • the other assets test under section 35-45. Overview of the Partnership's Business Operations The business operations of the Partnership consist of a primary production business involving cattle grazing and livestock. The farming business is registered, structured as a formal partnership, and maintains detailed records and compliance with tax and livestock regulations. The farming operations include maintaining a herd of cattle and conducting annual sales, depending on seasonal and market conditions. The farming operations have historically generated income. The operations are conducted with clear commercial objectives. Losses in recent years are attributable to environmental and market shocks. Impact of Drought on the Farming Business The business has been significantly impacted by severe drought conditions over multiple years. The drought began in early 20XX. In the financial year ( FY ) ending 30 June 20XX, drought conditions worsened from those experienced in FY ending 30 June 20XX - the Partnership's farm received virtually no rainfall over the last six months. The impact of the drought on the Partnership's farming business includes the following: • In FY ending 30 June 20XX, the average sale price per head of cattle dropped, and sales were brought forward from FY ending 30 June 20XX to support cash flow. • Distressed sales numbers due to the drought directly contributed to a further reduction in cattle prices and revenue in FY ending 30 June 20XX. • The business incurred hay costs due to lack of pasture, with additional feed costs anticipated. • Water scarcity due to the dam drying out led to heavy reliance on bore water, with significant investment required in pipes, pumps, and troughs to sustain livestock. Due to drought conditions, the farming business is projected to incur a loss for FY ending 30 June 20XX, due to continued dry weather, low stock prices, and high fodder costs. In terms of the expected future profitability of the business: • The business is actively investing in pasture recovery, including fertiliser and seeding, with the goal of harvesting its own hay to reduce reliance on external feed. • While FY ending 30 June 20XX outcomes will depend on rainfall and market prices, there is a reasonable expectation of profitability if conditions return to historical averages. • With major infrastructure projects conducted on the farm now largely complete (fencing, water), capital expenditure is expected to reduce significantly, supporting a return to profitability.

Relevant legislative provisions: Division 35 of the ITAA 1997 | Section 35-10 of the ITAA 1997 | Subsection 35-10(1) of the ITAA 1997 | Paragraph 35-10(1)(a) of the ITAA 1997 | Subsection 35-10(2E) of the ITAA 1997 | Section 35 - 30 of the ITAA 1997 | Section 35 - 35 of the ITAA 1997 | Section 35 - 40 of the ITAA 1997 | Section 35-45 of the ITAA 1997 | Section 35-55 of the ITAA 1997 | Subsection 35-55(1) of the ITAA 1997

Reasons for decision: Summary: Subsection 35-55(1) of the ITAA 1997 states the following: | Detailed Reasoning - Commissioner's discretion: (1) The Commissioner may, on application, decide that the rule in subsection 35 - 10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because: (a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances. The legislative intent behind the provision is set out in TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion: '30. The reason for providing the Commissioner's discretion in subsection 35-55(1) is described in paragraph 1.48 of the Explanatory Memorandum to the New Business Tax System (Integrity Measures) Bill 2000 (the EM): 7A The discretion is provided to ensure that certain individuals who carry on genuine commercial business activities are not disadvantaged due to particular circumstances which prevent them from satisfying tests 1 to 4... 31. The 'particular circumstances' referred to are those that would result in some unfairness or injustice if the loss deferral rule were to apply to the business activity. 32. In paragraph 35-55(1)(a) the phrase 'outside the control of the operators of the business activity' is used to convey the point that these 'particular circumstances' are not a consequence of the operator's actions or inactions and therefore it would be unreasonable to disadvantage operators by deferring the losses from their business activity.' In considering the exercise of the Commissioner's discretion in this case, paragraphs 13A, 14, 15 and 41D of TR 2007/6 are of particular relevance. These paragraphs state: '13A. For those individuals who do not satisfy the income requirement in subsection 35-10(2E) special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year(s) in question where: • but for the special circumstances, the business activity would have made a tax profit; and • the activity passes at least one of the four tests or, but for the special circumstances, would have passed at least one of the four tests. 14. The special circumstances must be outside the control of the operators of the business activity. Such circumstances are specifically defined to include drought, flood, bushfire or some other natural disaster. In the case of other events, failure for no adequate reason to adopt practices commonly used in an industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator. 15. The discretion can be exercised in income years after the one in which the special circumstances occurred if the effects of those special circumstances continue to prevent the business activity from satisfying any of the tests in those later income years. However, there may be situations where the special circumstances, because of their continued existence, become the ordinary or usual situation. It would not be appropriate to exercise the discretion once this occurs.' And; '41D. For individuals who do not satisfy the income requirement, the factors that must be satisfied before deciding whether to exercise the special circumstances limb of the discretion for an income year are that: • the business activity is affected by special circumstances such that it is unable to produce a tax profit; and • the business activity either satisfies at least one of the tests or is affected by special circumstances such that it is unable to satisfy any of the tests; and • the special circumstances affecting the business activity are outside the control of the operators of the business activity.' The farming business was affected by the drought that began in early 20XX and worsened in 20XX. The period of the drought corresponds with the period of deteriorating financial performance of the farming business, being the financial years ending 30 June 20XX and 30 June 20XX. Due to the drought, the Partnership suffered (and anticipates that it will continue to suffer) decreased revenue from the sale of cattle. The drought has led to increased costs related to: • feed costs: for example, the business has had to purchase a large quantum of hay as the cattle are unable to feed on pasture; and • water scarcity: due to the dam drying out, the business has had to rely heavily on bore water, with significant investment required in pipes, pumps, and troughs to sustain livestock. In this case, it is noted that all four commerciality tests have been satisfied, and that it is the income requirement in subsection 35-10(2E) that has not been met. Consistently with the approach adopted in paragraphs 13A, 14, 15 and 41D, and in light of the circumstances outlined above, the Commissioner considers that the drought is a natural disaster outside the control of the taxpayer and constitutes special circumstances that warrant the exercise of the discretion under subsection 35-55(1) of the ITAA 1997.