Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 12 January 2016
Published: March 2016
Ruling period: Year ended 30 June 20YY
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 1997 (ITAA 1997) to allow you to include any losses from your primary production business activity (the activity) in your calculation of taxable income for the relevant financial year? | A1: No.

Relevant facts and circumstances: You have operated the activity for a number of years. The activity has been profitable in three out of the last five years. During the relevant financial year the activity produced a loss. This was mostly due to the small business accelerated depreciation incentive, which allowed you to claim an immediate deduction for depreciable assets purchased. During the relevant financial year you were made redundant from your employment. As a result of your redundancy you received a payment, which meant your income for non-commercial loss purposes was above $250,000 in the 2014-15 financial year, thus failing the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You anticipate that the activity will be profitable in the subsequent financial 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), and | 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 income year in question where your business activity is affected by special circumstances outside your control. 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; 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. Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling: Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. In your case, you were terminated from your employment and as a result received a lump sum payment, which meant your income for non-commercial loss purposes in the relevant financial year was above $250,000. Receiving the payment did not affect your primary production activity causing it to make a loss, instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Further, we acknowledge that the small business accelerated depreciation incentive allowed you to claim an immediate deduction for depreciating assets. However, these expenses did not cause the activity to make a loss, they merely increased the loss the activity made for the relevant financial year. That is, even if you had not claimed these expenses, the activity would have still made a loss. While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.