Private ruling: Non-commercial losses and the Commissioner's discretion
Published: September 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 1980

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 farming enterprise in your calculation of taxable income for the 2011-12 financial year? | A1: No.


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 - Paragraph 35-55(1)(a).

Reasons for decision: Summary: For the 2009-10 and later income years Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless: (refer subsection 35-10(1) of the ITAA 1997). You have not satisfied the income requirement as the relevant income exceeds $250,000 and the exception in subsection 35-10(4) of the ITAA 1997 does not apply. Losses made from the activity in this year are therefore subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides that it would be unreasonable for this to occur. The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where the business activity is affected by special circumstances outside the control of the operators of the business activity. Such circumstances are specifically defined to include, but are not limited to, drought, flood, bushfire or some other natural disaster. 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 those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where: · but for the special circumstances, the 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. You advise your activities have not been profitable over recent years due to many factors including weather conditions and also economic conditions affecting the sale price of stock. While we accept that your activity was affected by these conditions, it is considered that the reason your activity has not made a profit is because of your decision to direct investment into your non-primary production activity over the past and have now commenced to reinvest capital into the primary production activity in the 2011-12 financial year. The circumstances you described are not considered to be different to those conducting similar activities. Your decision to direct capital away from the activity for many years causing it to now require substantial reinvestment was not out of your control. The Commissioners discretion in respect of special circumstances can not be exercised for the 2011-12 financial year.

Relevant facts: You have carried on a farming business since 1980. | The farming operations have not been profitable over recent years due to many factors including weather conditions and also economic conditions affecting the sale price of stock. | You established a non-primary production business in the late 1980's and financial resources from the farm were directed to this business and not into re-investment into the primary production business. | Over the past couple of years, you have got the non-primary production business sufficiently established that you are now in a position to re-invest into the farm. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income is more than $250,000. | the individual's business activity meets one of the four tests and the income requirement is also satisfied; | the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997; or | the individual comes within the Exception contained in subsection 35-10(4) of the ITAA 1997