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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private advice

Authorisation Number: 1051550112027

Date of advice: 12 August 2019

Ruling

Subject: Non-commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activities in your calculation of taxable income for the income years?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on

1 July 2018

Relevant facts and circumstances

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:

You are carrying on a business of primary production involving cropping and livestock.

Originally you had forecast to make a taxable profit in the 2018/19 income year. This was considered to be a commercially viable period for your primary production industry. However, a taxable profit has not eventuated as first forecast. This has been due to severe drought in the region where your farm is located.

Your income from both cropping and livestock sales were substantially less than expected. In addition our financials show the following changes in income and expenses for the income year ended 30 June 2019 which resulted from the drought:

 

Year

2017

2018

Agistment Income

$X

0

Fodder expenses

0

$X

 

Once the drought breaks, you estimate recovery will take 18 to 24 months and will include additional costs on pasture renovations and fertiliser and seed.

Statistics for 2016 to 2018 show a significant reduction in average rainfall in the region where your farm is located.

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

For the 2009-10 and later financial years, Division 35 of the Income Tax Assessment Act 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

·      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 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:

·        it is in the nature of the business activity that there will be a period before a tax profit can be produced

·        there is an objective expectation your business activity will produce a tax profit within a commercially viable period for your industry.

Special circumstances and the Commissioner's discretion

The discretion which could be applicable is found at paragraph 35-55(1)(a) of the ITAA 1997, which states that a discretion may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity, causing it to make a loss.

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.

Having regard to your full circumstances, based on the information you have supplied, the circumstances are considered "special circumstances" for the purpose of section 35-55 of the ITAA 1997; therefore the Commissioner can exercise his discretion under that provision.

Therefore, the Commissioner will exercise the discretion in the income years of the ruling.

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