Edited version of private advice

Authorisation Number: 1052399508019

Date of advice: 26 June 2025

Ruling

Subject: Commissioner's discretion - special circumstances

Question

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 in your calculation of taxable income for the 20YY-YY financial year?

Answer

No.

This ruling applies for the following period:

1 July 20YY to 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You operate a primary production activity in a partnership at a particular location.

Your income for non-commercial loss purposes is more than $250,000.

The business activity has not reported a tax profit.

The activity has made a loss in the 20YY-YY financial year. The loss was due to reduced rain conditions, doubling of mortgage interest rates, increase in hay prices and other farming costs, cessation of live export, and oversupply of meat.

Your expenses for the year included food for livestock, some capital purchases, and high interest expense.

You have provided evidence from independent sources in regard to the reduced rain condition that occurred in your area.

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

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•                     the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a));

•                     an exception in subsection 35-10(4) applies; or

•                     the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

In your situation, you do not satisfy the income requirement 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.

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 20YY-YY financial year, on the basis of special circumstances.

'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. An increase in mortgage interest rates or an increase in farm inputs such as fuel prices are not unusual or out of the ordinary and are not considered to be special circumstances.

Similarly, economic or other market fluctuations that might reasonably be expected to affect a business activity are not unusual or out of the ordinary and, are not considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

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.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion sets out when the Commissioner may exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The intention of the discretion was not where a 'business activity makes a loss because of factors which can apply to any business' (paragraph 10 of TR 2007/6). The discretion is for a commercial business activity that fails to satisfy any of the tests due to 'certain reasons outside the control of the operator' (paragraph 11 of TR 2007/6).

Paragraph 41D of TR 2007/6 says:

For individuals who do not satisfy the income requirement, the factors that must be satisfied before deciding whether to exercise the special circumstances limb of the discretion for an income year are that:

•                     the business activity is affected by special circumstances such that it is unable to produce a tax profit; and

•                     the business activity either satisfies at least one of the tests or is affected by special circumstances such that it is unable to satisfy any of the tests; and

•                     the special circumstances affecting the business activity are outside the control of the operators of the business activity.

If your business activity would have made a loss even if it had not been affected by special circumstances, it is unlikely that it would be considered unreasonable for the loss deferral rules to apply and the Commissioner is unlikely to exercise the discretion (paragraph 50 of TR 2007/6). If you do not meet the income requirement and your activity would have made a loss even if it had not been for the special circumstances, it is unlikely that the Commissioner would exercise the discretion (paragraph 50A of TR 2007/6).

The example 7A18A that begins at paragraph 129A of TR 2007/6 demonstrates when the Commissioner may and may not exercise the discretion:

129A. person A carries on a business of breeding cattle for sale and has done so for the past 20 years. In prior years this business activity has been very profitable. However, in the 20XX income year it was affected by drought, which caused person A to spend much more than anticipated on fertilizer and seed to maintain the condition of his pastures. The drought also affected the average sale price per head person A could obtain for their cattle. A large loss was made from the business for the 20YY income year.

129B. Person A did not meet the income requirement (subsection 35-10(2)(E)) for the 20YY income year. Therefore, the fact that his business activity satisfied both the assessable income and profits test for this year does not automatically mean that the loss deferral rule in subsection 35-10(2) does not apply. This is due to the change in paragraph 35-10(1)(a), and the introduction of subsection 35-10(2)(E) (the income requirement). They apply for the Commissioner to exercise the discretion under the special circumstances limb in paragraph 35-55(1)(a), and decide that the loss deferral not apply.

129C. Person A's application shows that special circumstances outside of their control, in the form of the drought, caused his business activity to make the loss in question, where, but for those circumstances a profit would have been made.

129D. The Commissioner notes the inherent profitability of the business, as borne out by its strong past performance in this respect. They conclude that, while the factors in paragraph 35-10(1)(a) are not directly to be applied, the fact that the business continues to satisfy the assessable income test and the profits test points towards it being 'commercial' in the sense indicated by the scheme of Division 35. The Commissioner concludes that it would be unreasonable in these circumstances for the loss to be deferred and exercises the special circumstances limb of the discretion.

129E. If the facts were that the business had not made a profit in recent times, and moreover, was not reasonably expected to do so in the future, the mere fact that, for example, the business satisfied the real property test, or the other assets test, would not, in itself, indicate that it was unreasonable for losses from the business to be deferred. This would be so, even if the business activity was affected by special circumstances to some extent, but not to the extent that these circumstances caused what would otherwise be a profitable activity to be one which made a loss.

It is accepted that drought constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. In your circumstances a profit has not been made in previous years.

Would a tax profit have been made but for the special circumstances?

Paragraph 11 of TR 2007/6 states:

Rather, it is intended to be available for a commercial business activity that has failed, or objectively is expected to fail for a period of time, to satisfy any of the tests in Division 35 for certain reasons outside the control of the operator.

Paragraph 13A sets out that for individuals who do not satisfy the income requirement:

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.

The following considerations lead us to believe that had the special circumstances not occurred the business activity would still have been in a loss situation:

•                     there has been no evidence provided that the farm activity has ever made a tax profit

•                     if not for the reduced rain conditions, the evidence supports that you still would have made a loss due to very high expenses as has occurred in previous years. This loss situation has occurred for a number of years and demonstrates high expenditure and losses regardless of any special circumstances.

Although you advised there were expenses incurred that were related to the reduced rainfall conditions in the 20YY-YY financial year, there were high expenses incurred that are not related to the special circumstances.

Reduced rainfall conditions related expenses in the 20YY-YY financial year included food for livestock. Regardless of increased costs the activity would still have made a significant loss due to the other high expenses not related to reduced rain conditions.The Commissioner is not satisfied that certain expenditure is directly related to the reduced rain conditions, which have increased the loss in the 20YY-YY financial year. Further, the Commissioner considers that had it not been for the reduced rainfall, the business activity would still not have made a tax profit.

You have invested in infrastructure development and improvements, significant plant and equipment expenditure, which while supporting the long-term viability and profitability of your business, remain personal business choices and are not expenses directly related to the special circumstances outside your control.

Additional information provided included notionalcosts or opportunity loss in relation to the special circumstances such as loss of hay production, or reduced sales. The actual cost of expenses incurred that relate to the special circumstances are considered for non-commercial loss purposes as distinct from notional figures.

The activity has not made a tax profit. You have not shown that but for the special circumstances the activity would have made a tax profit in the 20YY-YY financial year. Nor have you shown when it will produce a tax profit. That is, you have not demonstrated that, but for the special circumstances, you would have made a tax profit in the 20YY-YY financial year. In fact, you have never made a tax profit, so it could not be said that it was the lack of rainfall that caused the loss.

Conclusion

For the Commissioner to exercise the discretion under special circumstances, they need to be satisfied that the special circumstances have materially affected the business activity, causing it to make a loss. Your financial data provided does not indicate that the loss was mainly caused by the reduced rain conditions, rather it was caused by individual business decisions, strategies and subsequent high expenses.

Based on the information provided and your statements, you have made business decisions to operate the farm activity incurring a significant loss through significant investments in farm assets, infrastructure, development and improvements. These business decisions have led to the farm activity incurring a significant loss every year for a long time.

The Commissioner is not satisfied that your activity would have made a tax profit in the 20YY-YY financial year but for any special circumstances. Accordingly, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 20YY-YY financial year for the loss for the primary production activity. Any loss for that activity cannot be taken into account in calculating your taxable income for the 20YY-YY financial year.

As a result, you cannot claim losses from your farm activities against your other income in the 20YY-YY financial year. The losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. That is, the losses from the stated income year will be carried forward to be offset in later years when there is a tax profit from your business activity or if you meet the requirements in Division 35 of the ITAA 1997 to be able to claim the deferred losses in a later year.

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