Edited version of private advice

Authorisation Number: 1052367678324

Date of advice: 27 February 2025

Ruling

Subject: Commissioner's Discretion - non-commercial losses

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include the loss from your primary production business activity in the calculation of your taxable income for the income years ended 30 June 20XX to 30 June 20XX?

Answer 1

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences/d on:

1 July 20XX

Relevant facts and circumstances

1.              A and B conduct a business.

2.              A and B commenced their business on DD MM 20XX.

3.              The business is conducted in partnership and has X employees.

4.              The property where the business activity took place experienced lowest on record rainfalls, leading to drier seasonal conditions and increased costs in the 20XX financial year.

5.              Global market trends such as lower prices and higher global supply contributed to the decline in local prices.

6.              Any rain received was seasonally late.

7.              The sale price of goods sold decreased as a result of the drought in the 20XX financial year.

8.              The increased costs incurred resulted in losses in the 20XX financial year.

9.              The sale price of goods sold recovered in MM 20XX. However, the lack of rainfall has not improved.

10.          Assuming the property receives early rainfall in MM 20XX and historical average rainfall is met, it has been estimated that the partnership will return to a tax profit in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-10(4)

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 paragraph 35-55(1)(a)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997.

Division 35 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred. The deferred losses incurred may be offset against profits from the business activity. However, individuals may be able to offset against other income in the same income year if the income requirement and one of the other tests are satisfied, or if the commissioner exercises discretion.

Subsection 35-10 defers loses related to the business activities unless they satisfy one of four tests, are eligible for an exception or if the Commissioner exercises discretion. Further, the 'income requirement' in subsection 35-10(2E) applies to 2009-2010 and later income years.

In your case, you do not satisfy the income requirement as your income for the purpose of subsection 35-10(2E) for the income years in question is not less than $XX. Further, as your income is not less than $XX from other sources of assessable income, the exception under subsection 35-10(4) does not apply, even though your business activity would qualify. Therefore, your business loss for the relevant income years would be subject to the deferral rule under subsection 35-10, unless the commissioner exercises discretion.

As stated in paragraph 35-55(1)(a), the Commissioner's discretion may be exercised for one or more of the income years in question where the business activity is affected by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire, or some other natural disaster (Para. 12 TR 2007/6).

During the 20XX financial years, your business experienced significant droughts due to lowest on record rain falls. The increased expenses, alongside the decreased price of goods sold caused a significant loss in revenue. Because of this, the business was unable to produce a tax profit in the 20XX financial year. Natural disasters are considered to be special circumstances under Division 35.

The special circumstances limb is not only accessible by individuals who satisfy the income requirement. Individuals that do not satisfy the income requirement, but can demonstrate that their business operates commercially, and has been affected by special circumstances, may still be able to meet the special circumstances limb. (Para 41B TR 2007/6)

There are four objective tests to determine whether a business activity can be regarded as 'commercial' under Division 35. One of these tests needs to be satisfied or would have been satisfied if no special circumstances occurred. These four objective tests include:

•                assessable income test (section 35-30)

•                profits test (section 35-35)

•                real property test (section 35-40)

•                other assets test (section 35-45)

Your business activity satisfies three of the four of relevant tests, as follows:

•                The amount of assessable income is at least $XX.

•                The business activity undertaken resulted in a tax profit in three out of the past five years.

•                Other assets used in the business activity have a value of at least $XX.

The Commissioner's discretion can be exercised in later income years after the one in which the special circumstances occurred if the special conditions continue to prevent the business activity from satisfying any of the four objective tests in those later income years. However, continued existence of special circumstances may be considered an ordinary or usual situation, and it will therefore not be appropriate to exercise discretion once this occurs. (Para. 15 TR 2007/6)

As prices have recovered in the 20XX year, and the projections show that you will receive a net profit in the 20XX financial year, it is evident that the special circumstances are of a temporary nature and have not become the ordinary or usual situation.

Conclusion

In conclusion, the special circumstances you have experienced with the business have created a situation that renders the business unable to produce a tax profit. These special circumstances were outside of your control. The business satisfies three of the four relevant tests. In addition, you have shown that the special circumstances were temporary and have not become the usual situation.

Therefore, as per the principles set out in TR 2007/6 and the 'special circumstances limb' in paragraph 35-55(1)(a); the Commissioner will exercise discretion to allow you to include any losses from your business activity in the calculation of your taxable income from 1 July 20XX to 30 June 20XX.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).