Private ruling: Non-commercial losses - Commissioner's discretion
Date of advice: 7 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 200X

Ruling: Q1: 1. 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 relevant financial years? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a). | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision: Summary: The commercially viable period for your industry is about five years. You do not expect to produce a tax profit until year seven. However, your business activities were affected by the impact of special circumstances in the relevant financial years and this is the sole reason why your activities will not produce a tax profit for seven years. Therefore, the Commissioner will exercise the discretion available in paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial years and paragraph 35-55(1)(c) of the ITAA 1997 for the relevant financial years. | Detailed Reasoning - Detailed reasoning: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. A person will satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if their income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the relevant financial years. | Detailed Reasoning - Special circumstances (first limb): The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. For those individuals who do not satisfy the income requirement, special circumstances are generally those which have materially affected the business activity, causing it to make a loss. Special circumstances can include things like droughts and floods as well as pests and disease (Taxation Ruling TR 2007/6). | Detailed Reasoning - Nature of the activity (second limb): The Commissioner's discretion in paragraph 35-55(1)(c) may be exercised for the financial year where there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. | Detailed Reasoning - Interaction between the limbs: As stated above, ordinarily the operation of the first limb is confined to those situations in which the business activity has been affected by special circumstances outside the control of the operators of that activity where, had these circumstances not existed; the activity would have made a tax profit. However, the first limb may also apply to a business activity affected by such circumstances during a time when 'because of its nature' it is not able to produce a tax profit, but this time is still 'within [the] period that is commercially viable for the industry concerned'. In such a case, the enquiry is not whether the activity would have produced a tax profit had the special circumstances not existed (paragraphs 35 55(1)(b) and (c) already recognise that there are reasons outside the control of the operators of the activity why this would not have occurred, regardless of the existence of the special circumstances). In such cases the appropriate enquiry will be whether or not the special circumstances have meant that there is no longer an objective expectation that within the period that is commercially viable for the industry concerned the activity will produce a tax profit. Where the special circumstances are the sole reason why the activity can no longer objectively be expected to produce a tax profit within the period that is commercially viable for the industry concerned, but the activity is now expected to consistently produce a profit at some later time, the discretion may be exercised. It is agreed that the commercially viable period for your industry is approximately five years. You have also provided projected profit and loss statements that show you do not expect to produce income greater than the deductions attributable to it until the 20XX-XX financial year, or seven years after you commenced your business activities. You have stated that in the relevant financial years, your business activities were affected by drought and the ongoing effects of drought. These circumstances resulted in the reduction of your planned program. As a result, the expected time frame to reach full production has been delayed. These circumstances were outside your control and, therefore, are accepted as a 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. These special circumstances are the sole reason why your activities will not produce a tax profit within five years, or within the period that is commercially viable for your industry, but is now expected to produce a tax profit within seven years. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial years and in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the relevant financial years.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the relevant financial years? | Relevant facts: Your income for non-commercial loss purposes is in excess of $250,000. | Your business activity has been affected by special circumstances during the lead time period of developing the activity. | You have provided a copy of the original business plan and the modified plan due to the impact of the special circumstances. | You have provided information that indicates that the commercially viable period for your industry is normally 5 years. | You have provided forecast profit and loss figures. | You have provided evidence of the special circumstances and the impact the special circumstances have had on your business activity.