Private ruling: Non-commercial losses - Commissioner's discretion - special circumstances
Published: May 2015
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20VV | Year ended 30 June 20WW | Year ended 30 June 20YY
Date scheme commenced: 1 July 2007

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 business activity in your calculation of taxable income for the years ended 30 June 20XX to 30 June 20YY inclusive? | A1: Yes


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. The drought that is being taken into account as special circumstances occurred over a period of time with low rainfall over the last three years. It is the immediate and ongoing impact of this drought that has to be taken into account for a special circumstances discretion for the 20ZZ/XX to 20WW/YY income years, inclusive. The impact of the drought is a complex matter as there are various aspects that may impact on the profitability of a business activity, in any particular year. It is difficult to obtain clear evidence of what may or may not of happened in a particular year, because the outcome in those years also depends on what development and improvements may have happened to the property, if the drought had not occurred and the state of pastures and the end of the normal dry part of the year. All of these issues will affect the carrying capacity of the property and therefore the number of animals sold each year. In turn, this will impact on the potential profit of the activity in any particular year. It is accepted that the drought over this period, would have had an impact on the profitability of the business for an extended period of time. The evidence provided to show that a profit would have been made based on the carrying capacity of the land, normal sale prices and your average expenses is accepted. The figures are based on favourable assumptions where there is no impact from drought. This is based on the interpretation of the law that a profit would have been achieved except for the special circumstances. Based on all the material that is available and the difficulty of obtaining specific, conclusive evidence it will be accepted that potentially the impact of drought may have prevented the activity from making a profit in these years. Consequently the Commissioner will exercise his discretion for the years ended 30 June 20XX to 30 June 20YY inclusive.

Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. The documents forms part of and are to be read with this description. The relevant documents are: | • the application for private ruling | • the email providing further information and the livestock accounts | • the email providing further information and Forecast Trading accounts and forecast Profit and Loss Statements | • information from the previous private ruling | You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | You are carrying on a business on a property. | You have provided details of the carrying capacity of the property and the age of turn off of stock. | You submit that you were affected by special circumstances (drought) and have provided letters, newspaper clippings and government reports to show the extent of the drought in your area. | You passed the assessable income test in the relevant year. | You have provided copies of your actual livestock accounts which show the level of stock held and sold, and invoices for these sales. | You have provided copies of Trading Accounts and Profit and Loss Accounts to show figures that would have been applicable had you not been affected by drought in the 20ZZ/XX income year. | You have provided a letter from your doctor outlining periods of time when you were unfit for work due to illness. | ATO view documents: Taxation Ruling TR 2001/14 Taxation Ruling TR 2007/6.