Private ruling: non-commercial losses
Published: February 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 1996

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 2009-10 to 2010-11 financial years? | A1: No.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business. You are currently at full production. You submit the relevant lead time is typically up to five years. You submit that your business was affected by various negative factors. You were running at loss in the years prior to the special circumstances taking affect. You also submit that you were negatively affected by the Global Financial Crisis.

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 year, 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 Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred. Taxation Ruling TR 2007/6 explains that for those individuals who do not meet the <$250,000 income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year. 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. You submit that you were affected by special circumstances for numerous years. Obviously the extent of the losses for these years has been contributed to by the special circumstances. But this is not sufficient for the Commissioner to be able to exercise the special circumstances discretion. He must be satisfied that you would have made a profit but for these effects. It is noted that in the previous years when your sales were not affected by special circumstances your business still made losses. The overall picture of your business activity is that of gradually declining profits unrelated to the special circumstances submitted. It would be expected that if it was only the special circumstances that caused your business to make a loss, then it would have made a profit in the year preceding where normal sales were available. The Commissioner is not satisfied that if it were not for the negative factors you outlined, your activity would have made a profit in the 2009-10 and 2010-11 financial years. Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for those years. Please note that we do not consider the cancellation of contracts, both domestic and overseas to be special circumstances. The cancellation and the non renewal of contracts are situations that might be reasonably expected to occur when carrying on a business activity. They are as a result of ordinary market fluctuations and are not considered exceptional or out of the ordinary.

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