Private ruling: Non-commercial losses - Commissioner's discretion
Published: February 2015
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

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 business activity in your calculation of taxable income for the 2013-14 and 2014-15 financial years? | A1: Yes


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, and • 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, and • you have met one of the four tests or would have but for special circumstances. Consequently the Commissioner will exercise his discretion in the 2013-14 and 2014-15 financial years.

Relevant facts: You carry on a primary production business. | Your produce is marketed to various states of Australia. | You made profits from your activity in two out of the last five income years. | The business was affected by rainfall and flooding in the 2012-13 financial year, which completely washed out a number of trees along with infrastructure such as irrigation. | Replacement trees planted will not bear produce until the 2016-17 harvest. | This will significantly impact the profitability of the business due to the combination a very significant decrease in productivity with increasing costs in order to combat tree health and fertiliser deficiency. | Additional costs were incurred in stripping trees of damaged produce, spraying for disease, staking trees and reinstalling damaged irrigation. | Other trees were only damaged and did not need replacing so the timeframe for recovery of these trees is shorter. | You anticipate that the business will produce a small profit from the damaged trees in the 2015-16 income year. | You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997. | You have provided income and expenditure figures for the 2010-11 through to the 2012-13 financial years and estimated income and expenditure figures for the 2013-14 to 2014-15 financial years.