Edited version of your written advice

Authorisation Number: 1012709086668

Ruling

Subject: Non-commercial loss

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 2014 financial year?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are a part of a partnership that carries on a mixed farming primary production business at an address.

You commenced business operations a number of years ago.

The partnership had made a profit for a number of financial years previously. However you submit that you were affected by drought and have made a business loss during the 2013-14 financial year.

During the 2013-14 financial year you were forced to sell a capital asset which is held in your name only, to pay down business debt and to help fund business operations during the drought.

The sale of the asset resulted in a capital gain in your name only. As a result you do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

The profitability of the business will continue to be dependent on rainfall, and you expect to continue to make a business loss for the 2014-15 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)(a)

Reasons for decision

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, 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 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.

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 do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income years in question where, but for the special circumstances:

• your business activity would have made a tax profit

• the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. As a result of these special circumstances you were required to sell a capital asset to finance the business operation.

Further, it is accepted that:

• but for the special circumstances, you would have made a tax profit

• you have met one of the four tests or would have but for special circumstances.

Consequently the Commissioner will exercise his discretion in the 2014 financial year.