Edited version of your written advice

Authorisation Number: 1051281089675

Date of Advice: 14 September 2017

Ruling

Subject: Non-commercial losses

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 2012-13 financial year?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

Your income for non-commercial loss purposes for the 20XX financial year is over $X.

Your family have been in the business since 19XX.

You are carrying on a business (the activity).

You are also operating another enterprise from the property.

In the 20XX financial year the one activity made an operating loss, while the other enterprise made an operating profit.

You submit that the activity was affected by circumstances for a number of years, which has impacted on the activity's profitability for the 20XX financial year.

The following circumstances impacted on the profitability of the activity:

● the activity has been affected by conditions for a number of years

● certain events in previous years caused damage to infrastructure which had to be repaired and reconstructed.

● certain purchases increased due to the conditions

● the conditions affected your sales.

● changes in Government policy affected the market.

● Low market prices

The effect of the above circumstances, combined with the low market prices, pushed the activity into large operating losses. Some of the key expenses incurred in the 20XX financial year include:

● Non-Capital Purchases

● Other Purchases

● Repairs and maintenance

You have provided figures where you have calculated the number of products that would have been sold in 20XX based on the six year average from the years 20XX to 20XX with an average sale price based on a two year average of $X from the years 20XX to 20XX.

The average sale price over the six year period from 20XX to 20XX is $X.

You have provided profit and loss statements for the 20XX to 20XX financial years which show you have failed to make a profit for 20XX to 20XX financial years.

You submit that the circumstances impacted on the profitability of your business in the following ways:

● reduced turnoff in 20XX financial year of X product, compared to a six year average of X product.

● Reduced product prices of $X per product, compared to a two year average of $X

● Revised 20XX-XX profit and loss statement showing reduced expenses for;

○ Non Capital Purchases $X

○ Other Purchases $X

○ Repairs and maintenance $X.

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 20XX-XX 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.

Special circumstances

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are generally those which have materially affected the business activity, causing it to make a loss.

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.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control; 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.

You have provided a revised profit and loss statement with regards to the 20XX-XX financial year, showing the amount of product sold would have been X at an average sale price of $X and along reduced expenses would have resulted in a profit.

We do not believe that the average price of $X per product is a reasonable reflection of the average that should be applied to determine the fiscal effect that the special circumstances had on the profitability of the business for the 20XX-XX financial year. We believe that a more reasonable average calculation would include year's surrounding the 20XX-XX financial year, for example, 20XX-XX, 20XX-XX, 20XX-XX and 20XX-XX. These figures provide a more reasonable average of X of product sold at an average price of $X.

These averages when compared to your revised 20XX-XX expenses for Non-capital Purchases $X, Other Purchases $X and repairs and maintenance $X clearly show the business would have produced a loss.

In summary, the Commissioner does not accept that a special circumstance was the only reason that prevented your business activity from producing a tax profit. Therefore the Commissioner is unable to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2012-13 financial year.