Edited version of private advice

Authorisation Number: 1051596933488

Date of advice: 4 November 2019

Ruling

Subject: Commissioner's discretion for 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 productionbusiness activity in your calculation of taxable income for the 2018-19 financial year?

Answer

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Consequently the Commissioner will exercise his discretion to extend the lead time to 30 June 2019.

Further information on non-commercial losses can be found by searching 'QC 33774' on ato.gov.au

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commenced on:

1 July 2018

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 primary production business activity which commenced in early 2016.

You submit that you were affected by special circumstances in the 2017-18 and 2018-19 financial years.

You have submitted the following evidence to substantiate your claim:

·         Written confirmation from a Hospital that you experienced a serious medical event in the second half of the 201X-201Y financial year.

·         Confirmation from the relevant Australian Government authority that the area where you conduct your business activity has experienced severe weather conditions between early in 201X and 30 September 201Z.

·         A recent medical report from a Hospital confirming you being diagnosed of a serious illness.

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

·         In the 201X-1Y year severe weather conditions affected the business to the extent that you sell a lot of your livestock at lower prices at unfavourable times due to your inability to carry them and feed them to the desired weight for sale.

·         However the severe weather conditions have been having a serious effect on your business since that start of 201X. Due to the severe weather conditions, instead of being able to hold onto and feed your livestock until they were 12 months old (and ideal for sale), you needed to sell them off earlier before they dropped back in condition. This meant lower prices for the livestock, and increased expenditure such as changes in irrigation, stocking rates, pasture selection along with a change in your fertiliser program with the aim of increasing your topsoil profile that will hold and maintain more moisture.

·         You also experienced a serious medical event in the second half 201X-1Y financial year, which had a significant impact on your own health from that point onwards. This meant that your ability to run your business was greatly affected, as you were unable to function at full capacity. The serious medical event caused you to lose certain functions, which have gradually returned. However you still have some ongoing issues with memory and energy levels as a result of the serious medical event you suffered.

·         Following the serious medical event you accepted a voluntary redundancy from your employer, due to your health and reduced energy levels. This caused you to fail the NCL income requirement for the first and only time, and you will not expect to fail the NCL income requirement in any future years, given your current circumstances.

·         The lack of energy has been the main effect on your primary production business. Your spouse has employment and your children are either employed or studying. This has led to increased use of contractors and other services on regular jobs that you would have done yourself had it not been for the serious medical event.

·         You also faced a delay in the birth of your livestock due to a faulty animal. Unfortunately you did not discover that the male animal you hired had insufficient breeding abilities and was unable to mate with the female breeders. This had a direct impact on your business such that two parts of your overall herd should have been at the right age at the right time of the year to take advantage of the pasture feed were a few months behind (the faulty animal was with the female breeders for a couple of months, and it was not until the following couple of months that you observed the female breeders coming into standing heat, and at that point you had to arrange for the hire of a different male animal). Overall, this delayed the timing of having livestock for sale and the consequential sale prices you received.

·         You have been recently diagnosed with a serious illness. This has had significant impact on your general health. You will shortly begin intensive treatment. Following this you will have two weeks of recovery, and you will then have an operation. It is inevitable that the intensive treatment will significantly reduce your already reduced energy levels. As such you cannot be certain how much capacity you will have to run your primary production business, as this will depend on how well you can recover and how successful the treatment is. Due to this you may continue to incur higher contractor expenses.

As a result of the special circumstances mentioned above, you estimate that around 50 to 60% of the additional expenses incurred are directly attributable to those special circumstances, and 40 to 50% of the additional expenses were attributable to future proofing your business against any potential ongoing severe weather conditions (such as adding additional watering, bore and pasture work), which will make your primary production business more productive and viable one into the future.

You intend to make a profit in the 2020-21 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)