Edited version of private advice

Authorisation Number: 1051938755208

Date of advice: 20 January 2022

Ruling

Subject: Non-commercial loss - special circumstances

Question

Will the Commissioner exercise their discretion under subsection 35-55 (1)(a) of the Income Tax Assessment Act 1997 ('ITAA 1997') to allow you to include any losses from your business activity in your calculation of taxable income for the 20XX financial year?

Answer

Yes. Having regard to your circumstances it is accepted the special circumstances prevented your business activity from commencing in the XXXX financial year, and but for the special circumstances you would have met one of the tests and recorded a tax profit in the XXXX financial year.

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

You do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a business.

You commenced business operations in the XXXX financial year due to special circumstances.

In the XXXX financial year, drought impacted the profitability of your business activity.

Your business was impacted in the following ways:

•         You were unable to commence planting as you had planned.

•         Had this crop been planted, harvesting would have occurred, resulting in assessable income being reported for the business.

•         Based on your estimates, a tax profit would have been reported for the business activity in the financial year but for the special circumstances.

Due to easing of the drought, you were able to plant a crop which will be harvested.

You intend to report a profit in the XXXX 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)

Income Tax Assessment Act 1997 subsection 35-55(2)

Reasons for decision

Subsection 35-55 (1) (a) of ITAA 1997 provides the Commissioner with discretion to decide, on application, that the rule in subsection 35-10(2) is to not apply to a business activity. The discretion requires that the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity was impacted by special circumstances outside the control of the business operators.

Drought is a well-established category of special circumstances per 35-55(1) (a) of ITAA 1997 and Taxation Ruling 2007/6 Income tax: non-commercial business losses: Commissioner's discretion ('TR 2007/6') paragraph 13A. It is accepted that your region was in drought during XXXX, and that drought conditions have eased which has resulted in planting now being possible.

It is accepted that due to the special circumstances of drought, the business activity was not able to commence as intended. You have incurred preliminary expenditure in relation to this activity to evidence this intended start date.

You have provided independent evidence to establish that a lead time of 7 months is applicable to the business activity (TR 2007/6 paragraphs 16B and 18).

In your situation, it is accepted that you anticipated earning assessable income and reporting a tax profit in the XXXX financial year, however due to the special circumstances this was unable to occur. The business activity has subsequently commenced and expects to report a tax profit, which indicates that the activity is 'commercial' in nature as intended in the sense indicated by the scheme of Division 35 of the ITAA 1997.