Edited version of private advice

Authorisation Number: 1051749954808

Date of advice: 4 September 2020

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 productionbusiness activity in your calculation of taxable income for the 20XX to 20XX financial years?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You do satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You commenced business operations on 1 July 20XX as part of a partnership.

You carry on a business on YY acres of land near Town A in Australia.

The business has sold product since the 20XX financial year. The partnership employs casual workers during the picking season.

In early 2013 flooding in your area resulted in damage to the product with approximately XXX trees destroyed. The remaining trees were heavily damaged in their branches and root systems.

Shortly after this the partners entered into a contract and paid a deposit to Nursery A to supply replacement trees. Regrettably, this nursery went into receivership and was deregistered without having delivered any of the contracted trees.

You attempted to secure other trees from different nurseries; however, since all farmers in the area had also been affected by flooding, nursery stocks were unable to meet local demand.

The partners then ordered further trees from different nurseries and some were delivered in 2015. However, 50% of these new trees died and delays occurred until the nursery could replace them. The replacement trees were only able to be replaced and planted in March 2020. These replacement trees were provided at no cost.

You believe that, had the floods not occurred, the business would now be profitable. In the 20XX and 20XX financial years the business satisfied the $20,000 assessable income test of Division 35 of the ITAA 1997. The trading history shows that, but for the floods, the business would have satisfied this test in 20XX and future years.

You now anticipate that the business will be profitable in 20YY and have provided financial projections to support this view.

You applied for a private ruling allowing the exercise of the Commissioner's discretion for non-commercial losses and a favourable ruling was issued in late 20ZZ.

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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income 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 income 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 income year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you meeting one of the four tests. Your trading history shows that you passed the $20,000 assessable income test prior to the event of the floods. It follows that the Commissioner accepts that if not for the floods, you would have continued to pass this test.

The special circumstances are that your business suffered from flood damage in combination with the loss of trees to flood damage and the inability of local nurseries to supply replacement trees in a reasonable commercial timeframe. These circumstances were then exacerbated by the loss of replacement trees which could only be replanted recently. These circumstances were all outside your control and led to you not meeting any of the tests.

Consequently, the Commissioner will exercise his discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the 20XX-XX to 20XX-XX financial years.