Private ruling: Non-commercial losses-Commissioner's discretion
Published: March 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

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 the calculation of taxable income for the 2012-13 financial year? | A1: Yes.

Relevant facts and circumstances: You operated a primary production business that regularly produced profits however suffered losses in drought years. The turnover for the 2012-13 financial year was in excess of $20,000 and although not drought declared, the 2012-13 financial year was not a good year as lower produce prices and extra costs resulted in a loss for the year. The business is expected to make a profit in the 2013-14 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 paragraph 35-55(1)(a) | Income Tax Assessment Act 1997 subsection 35-10(2E) Detailed reasoning | 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 did not satisfy the income requirement and did not come under any of the exceptions. The relevant discretion may be exercised for the financial year in question where the business activity is affected by special circumstances outside the control of the taxpayer. | '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 in question where, but for the special circumstances: | • the 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. | Your primary production activities show losses in the 2012-13 financial year due to drought like conditions that increased costs and reduced sales. | It is accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Therefore the Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2012-13 financial year.