Private ruling: Non-commercial losses - Plant growing
Date of advice: 1 June 2016
Published: December 2016
Ruling period: Year ended 30 June 20YY | Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act (ITAA 1997) to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 20YY and 20ZZ financial years? | A1: No.


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 • the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. In your case, it is the Commissioner's view that unseasonal weather conditions and disease may constitute special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. The following considerations lead us to believe that had the special circumstances not occurred the business still would have returned a loss: • The Commissioner cannot be satisfied that your activity would have made a profit but for the exceptional circumstances. • Your claimed expenses are consistently excessively high in comparison to your income from your plant farming activities. Since the commencement of this operation, there has been little indication that you were ever likely to achieve a tax profit and have relied on the Commissioner's discretion every year to utilise substantial losses to offset your income from other sources. • You now plan to reduce your plants significantly and move into a different primary production activity of raising animals for sale. This is also a strong indication that there is not a foreseeable time in the future that your plant growing activities will achieve a tax profit. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.

Relevant facts: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | You conduct a plant based farming activity. | You commenced business operations several years ago. | You have been granted the Commissioner's discretion for your farming activities on two previous occasions based on lead time in your relevant industry. | You submit that you were affected by special circumstances in recent years. | You have submitted the following evidence to substantiate your claim: | • Profit & loss statements | You have not submitted any other evidence to support your claims or to support how you arrived at your forecasted profit projection amounts. | You submit that the special circumstances impacted on the profitability of your business in the following ways: | • In the past year you have had further unseasonably wet and excessive wind weather conditions | • These conditions have created continued fungal infections in the plants | • This has caused sporadic crop production, large portions of the plants not producing at all and approximately 25% of the plants dying off | A portion of your property is used for the farming activity. | You currently have XX plants; however, you are planning on reducing your plants to one-fifth after harvesting the current crop to continue a trial in order to determine if you can produce a viable harvest at some time in the future. | You intend to commence an animal based activity on the property in late 20ZZ, using the current agricultural area plus an additional area for this new purpose. | You intend to return to profit in the 20VV financial year, though this projection is based on potential animal sales rather than olive production.