Edited version of your written advice

Authorisation Number: 1013038443914

Date of advice: 28 June 2016

Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question 1

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 primary production business activity in your calculation of taxable income for the relevant financial years?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20EE

Year ended 30 June 20FF

Year ended 30 June 20GG

Year ended 30 June 20HH

Year ended 30 June 20II

Year ended 30 June 20JJ

The scheme commenced on:

1 July 20AA

Relevant facts and circumstances

You commenced your primary production activities, as a sole trader, in the 20AA-BB financial year.

The enterprise is a sole proprietorship.

The enterprise is conducted on x hectares of agricultural land.

The enterprise will produce a variety of products from the property.

Some items during years 4 through 6 were intended to provide initial products as a source of income.

The property has no artificial irrigation available and it is reliant on natural rainfall.

The area where the property is located was drought declared in 20CC.

The enterprise originally planted over x items and were required to replace more than 50% of the items as a result of the drought. This has resulted in a delay in the ability to harvest some items in order to generate the income by 20DD-EE year.

The ongoing drought conditions have delayed the expected date of meeting the assessable income test until the year ended 30 June 20JJ.

Previously granted discretion for lead time for the years ending 30 June 20BB to 30 June 20EE.

Your income for non-commercial loss purposes is over $40,000 but below the $250,000 threshold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-1

Income Tax Assessment Act 1997 subsection 35-10

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 section 35-40

Income Tax Assessment Act 1997 section 35-45

Income Tax Assessment Act 1997 subsection 35-55(1)

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision

The Commissioner is satisfied that your activities would have met one of the four tests if it had not been affected by special circumstances. Therefore, the Commissioner will exercise the discretion available in relation to your primary production activities for the 20EE-FF, 20FF-GG, 20GG-HH, 20HH-II, 20II-JJ financial years.

Detailed reasoning

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless:

• the exception in subsection 35-10(4) of the ITAA 1997 applies; or

• you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or

• if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your assessable income from sources not related to this activity was more than $40,000 in the 20CC-DD financial year. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997.

The Commissioner's discretion - special circumstances

Where the income requirement is satisfied, the Commissioner's discretion, under paragraph 35-55(1)(a) of the ITAA 1997, can be exercised where a business activity is affected by special circumstances, outside the control of the operators, such that it is unable to satisfy any of the tests.

Taxation Ruling TR 2007/6 sets out 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.

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all business within a particular industry. 

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, your property was severely affected by the drought.

It is accepted that these conditions were outside your control and are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that prevented your activities from meeting one of the tests.

The Commissioner previously exercised the discretion in section 35-55 of the ITAA 1997 for the 20AA-BB to 20DD-EE financial years. This ruling was based on your ability to commence some harvesting in the 20EE-FF financial year. This harvesting was expected to produce income in excess of $20,000 from your activities.

The region was drought declared in March 20CC. The enterprise originally planted over X items and were required to replace more than 50% of the items as a result of the drought. This has resulted in a delay in the ability to harvest some items in order to generate the income by 20DD-EEyear.

You have now replaced the product and there will be a period of time until the products are sufficiently grown in order to generate income.

The income figures for the 20II-JJ financial year show that your trees are able produce income in excess of $20,000 and, had it not been for the drought, you should have produced similar income in the 20EE-FF, 20FF-GG, 20GG-HH, 20HH-II, 20II-JJ financial years.

The Commissioner is satisfied that your activities would have met one of the four tests if it had not been affected by special circumstances.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your primary production activities for the 20EE-FF, 20FF-GG, 20GG-HH, 20HH-II, 20II-JJ financial years.

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