Edited version of your private ruling

Authorisation Number: 1012529591977

Ruling

Subject: Non commercial losses

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 your primary production business activity in your calculation of taxable income for the 2012-13 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are the sole proprietor of a primary production business.

You are also employed.

During the relevant financial year, you received back pay from your employment that related to the two previous years.

If not for this back pay, you would not have earned more than $40,000 in non primary production income during the relevant financial year, thus enabling the primary production losses to be claimed against the non primary production income.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997.

Relevant legislative provisions

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

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

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

Reasons for decision

Summary

There is no evidence that the special circumstances prevented your business activity from meeting one of the four non-commercial loss tests or producing a tax profit in the relevant financial year. Therefore, the Commissioner is unable to exercise the discretion available in relation to your primary production business.

Detailed reasoning

For the 2009-10 and later financial years, Division 35 of the ITAA 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, or

· the Commissioner exercises his discretion.

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the financial year(s) under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control.

'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.

For individuals who satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the financial year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests.

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. 

You have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997.

Your business is a primary production activity. You received back pay from your employer in relation to your employment. This back pay increased your non primary production income to over $40,000 and therefore, the exception contained in subsection 35-10(4) of the ITAA 1997 does not apply.

However, receiving this payment did not affect your business activity, causing it to make a loss. Instead it caused you to be unable to access the exception in subsection 35-10(4) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.

Further issues for you to consider

Where you cannot offset your business loss against any of your other assessable income in a financial year, your loss is simply deferred to future years. If your business makes a profit in a following year, you can offset the deferred loss against the amount of this profit.