Private ruling: Commissioner's discretion - Non-commercial losses
Published: May 2014
Ruling period: Year ended 30 June 2013.

Ruling: Question and answer | Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include any losses from your primary production business activity in your calculation of taxable income for the income year? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • The application for private ruling was received. • Further information was required. You income was greater than $250,000, therefore you do not satisfy the income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997 . You received an unusual amount of income from certain royalties which totalled greater than $250,000.00. The unusual amount of income arose from major projects conducted in your area. It is anticipated the projects will be either completed and or slowing down, therefore a decrease in income for the income year. You also carry on a business activity which made a loss in the income year. The business activity is primarily concerned with agriculture. You conducted the business activity for many years. You submit that you were affected by special circumstances during income year. You have submitted the following evidence to substantiate your claim: • Primary Production Statement for the year end. • Profit and Loss Statement for the year end. • Monthly rainfall readings for four years. • Stock schedule for the year end. You submit that the special circumstances impacted on the profitability of your business activity in the following ways: • Sales have decreased; in the year; less sold previous years. • The condition of the product has decreased affecting the sale price. • Calving rates have fallen due to a decline in breeding females and their condition. • Decrease in gross profit from trading. • Agistment fees have risen. • Poor condition of the pasture extra fodder was purchased. • Lower rainfall. • Major repairs deferred over previous years due to insufficient funds had to be carried out. • An increase in borrowed funds and in interest on loans. You intend to return to profit in the next income year.

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 income years, Division 35 of the Income Tax Assessment Act 1997 ( 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 in subsection 35-10(2E) of the ITAA 1997. If you do not satisfy the income requirement special circumstances are those which have materially affected the business activity, causing it to make a loss. Taxation Ruling TR 2007/6, paragraph 13A states; For those individuals the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income year(s) 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 at least one of the four tests. '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. Having considered your full circumstances, the Commissioner is satisfied that your business activity was affected by special circumstances outside your control and that this prevented you making a profit. The business activity has also passed at least one of the four tests. Consequently the Commissioner will exercise his discretion to allow you to include any losses from your primary production business activity in your calculation of taxable income for the income year.

Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.