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

Ruling: Questions and answers | 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 2012-13 income year? | No.

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 received. • Further information. Your income for the financial year ended 30 June 2013 is 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 interest which totalled greater than $250,000.00. The unusual amount of interest arose because you entered into an agreement whereby the funds are held on deposit by you. You are currently receiving all the interest earned on the deposit. If and when the deposit is released to you will be able to use the funds to improve your business. You also carry on a business activity which made a loss in the 2012-13 income year. The business activity is primarily concerned with primary production. You have been in the primary production business for many years. You expanded your business activity with the purchase of an additional property which has increased your debt levels and interest repayments. It was the intention of the partnership to increase the primary production which in-turn would have increased revenue which would have assisted in covering the interest on the loan obtained to purchase the property. The business activity has consistently made a profit. You submit that you were affected by special circumstances, low prices and drought, in the 2012-13 income year. You have submitted the following evidence to substantiate your claim: • Trading Statement for previous years including the year of loss. • Profit and Loss Statement for previous years including the year of loss. • Yearly rainfall readings for previous years and the year of loss You submit that the special circumstances impacted on the profitability of your business activity in the following ways: • Most of the rainfall was received from late December to March each year which resulted in the financial year being exceptionally dry. • During the prolonged dry the produce degrade and the decision was made to sell. Consequently more produce was sold between in late 2012 than in the previous year. • At least half of the product did not produce. • The new property purchased has experienced prolonged periods of low rainfall (no data available), consequently there was no increase in product on the property and the current level of product is below the properties carrying capacity. The gross profit from the trading of produce in the year of the loss was more than the previous year. The total expenses for the year of loss included a large sum of interest repayment relating the loan for the new property.

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 not satisfied that your business activity was affected by special circumstances outside your control and that this prevented you making a profit. The Trading Statement for the year of loss shows that despite the effects of drought, substantially lower rain fall, your gross profit from trading showed an increase from the previous year. We acknowledge you sold extra product in the loss year, due to the prolonged dry the product degraded and the decision was made to sell, however, any additional expenses in re-building the product and possible losses as a result of reduced sales could be accounted for in following financial years. The profit and loss statement for the loss year sets out the business activity expenses incurred; where most expenses are comparable to the previous year there is an increase in the interest paid from the previous year to the loss year due to the purchase of the new property. Therefore, your loss for the financial year is not primarily because of drought but due to the expansion of the business activity and the increase in interest repayments on the loan. If you had not purchased the new property you would have made a profit in the year of loss. Consequently the Commissioner will not exercise his discretion to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2012-13 income year.