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Ruling

Subject: non-commercial losses

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2012-13 financial years?

Answer No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2012-13 financial years?

Answer No.

This ruling applies for the following period

Year ended 30 June 2011
Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 1986

Relevant facts and circumstances

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a business primarily devoted towards livestock breeding, training and racing.

You have acted as a sole trader in the industry as a breeder, trainer and racer for over X years.

The business made a tax profit in a number of years in the 2000's.

Income is generated from a combination of livestock sales and stake winnings.

Due to stock deaths and write offs in 2010-11 financial year the business made a loss. You also expect to make a loss in the 2011-12 and 2012-13 financial years.

You expect to return to profit in the 2013-14 financial year.

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)(c)

Reasons for decision

For the years prior to the 2009-10 financial year, all taxpayers have access to the four non-commercial loss (NCL) tests (the assessable income test, the profits test, the real property test, and the other assets test) in determining whether they are required to defer their business losses under the NCL provisions.

From the 2009-10 income year, the NCL legislation has been amended to include an income requirement. The four NCL tests are only available to taxpayers who meet the income requirement.

Consequently, if the income requirement is not met, the taxpayer must defer their business loss unless the Commissioner exercises a discretion. A discretion is only available in certain circumstances.

The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not meet the income requirement.

Paragraph 35-55(1)(a) of the ITAA 1997

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred.

Taxation Ruling TR 2007/6 explains that for those individuals who do not meet the <$250,000 income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year.

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.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course

Later, in the Federal Court Case of Employment, Education, Training Youth Affairs, Department of v. Barrett (1998) 82 FCR 524; (1998) 27 AAR 291; (1998) 52 ALD 499; (1998) 3SSR 38 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Beadle Director-General of Social Security, Re (1984) 1 AAR 362; (1984) 6 ALD 1 at 3:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special. 

In your case, your livestock breeding and racing business made a loss in the 2010-11 financial year due to stock deaths and write-offs and you expect these losses to continue into the 2011-12 and 2012-13 financial years whilst you rebuild stock numbers.

It is not accepted that the stock deaths and write offs which affected the business in 2010-11 financial year constitute special circumstances. The sale, death or injury of stock can be seen as a normal occurrence in the horse breeding/racing industry and could reasonably be expected to occur in the normal course of business.

Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised with respect to the 2010-11 to 2012-13 financial years.

Paragraph 35-55(1)(c) of the ITAA 1997

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.

· for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C).

The note to this paragraph states that it is:

…intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

TR 2007/6 states that the 'lead time' discretion provided for by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made.

The 'lead time' discretion is not available once a business activity has made a tax profit. This is because it is then clear that there is nothing inherent in the nature of the business activity that prevents a tax profit from being made. The only exception to this is where a business activity makes a tax profit on a one-off basis during the initial 'lead time' period. For example, a forestry operation may have a lead time of 20 years before harvesting its trees but may make a one-off tax profit in an earlier year due to a thinning operation. In that case, the one-off tax profit would not effect the lead time period.

In your case, your primary production business made a tax profit in a number of years in the 2000's. Your business has been operating for over X years. It is apparent that your business did not have an initial period where a tax profit could not be made due to the nature of the business activity. The tax profits that your business made were not one-offs that fall within the exception discussed above.

The loss in the 2010-11 financial year was attributable to stock deaths and stock write offs. This additional expenditure is an individual circumstance affecting your particular business activity rather than an inherent characteristic that affects all businesses in the industry. However, this is not a decisive issue. The fact that your primary production business made several tax profits in its earliest years shows that there was no initial 'lead time' period required for it to make a tax profit. Therefore, the Commissioner is unable to exercise the 'lead time' discretion in paragraph 35-55(1)(c) of the ITAA 1997 with respect to the 2010-11 to 2012-13 financial years.