Private ruling: Non-commercial losses - Commissioner's discretion
Published: July 2013
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 primary production activities in your calculation of taxable income for the relevant financial year? | A1: No.

Relevant facts and circumstances: Your income in the relevant financial year for non-commercial loss purposes is over the $250,000 threshold. You have conducted a primary production activity for over 40 years. You currently run livestock as trading stock. You have chosen to breed livestock to expand your herd rather than buy in order to keep your bloodlines pure. You purchased additional land funded using a substantial loan. You have inherited funds that will be applied to your loan to substantially reduce or even eliminate the farm debt and return the business to profit. The excessive rainfall in your region during the relevant financial year, and the subsequent flooding, caused leaching of the soil which reduced nutrients and adversely affected fertility rates. The flooding destroyed pastures and caused landslides, it also destroyed fences and as a consequence your livestock dispersed hindering the muster and delaying sales until the subsequent financial year. The previous drought and now the floods have caused low reproductive rates and have only now returned to normal, meaning a further two years before full turn-off will be achieved. Since the 1999-2000 financial year a tax profit was produced in the 200X financial year. You now expect your activities to produce a tax profit in the subsequent financial year. 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 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 the 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 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. It is accepted in your case that the drought and floods 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. Paragraph 50A of Taxation Ruling TR 2007/6 states; Where the business activity is carried on by an individual who does not satisfy the income requirement and this activity would have made a loss even if it had not been affected by special circumstances, it is also unlikely that it would be considered unreasonable for the loss deferral rules to apply and therefore the Commissioner is unlikely to exercise the discretion (Refer to Example 7A at paragraph 129A of this Ruling). The following considerations lead us to believe that had the special circumstances not occurred the business still would have returned a loss. You purchased additional land funded by a substantial loan. You have chosen to breed livestock to expand your herd rather than buy in order to keep your bloodlines pure. You have produced a tax profit in only one year over the past decade. Since the 200X financial year the interest expense has had a major impact on your ability to show a profit. Also, as you have only produced a profit in one year in more than a decade, it is not possible to identify and determine that special circumstances prevented a profit in the relevant financial year. It is considered that other factors such as financing and business practices rather than special circumstance has prevent you from making a profit in the relevant financial year. For the relevant financial year you have not shown that you would have made a profit but for the special circumstances. The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the year in question.