Edited version of private advice

Authorisation Number: 1051973611190

Date of advice: 27 April 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

Will the Commissioner exercise his discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the year ended 30 June 20XX?

Answer

No, there is no discretion available to the Commissioner.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

3 February 20XX

Relevant facts and circumstances

You are a sole trader.

You have a livestock farm and carry on a primary production business activity.

You buy and sell sheep and cattle.

Your income from your employment is approximately $XXX for financial year ending 30 June 20XX.

You are expecting to receive Payment A of $XXX in the financial year ending 30 June 20XX

You have forecast to make a loss from your business activity for the year ending 30 June 20XX.

You have not provided any specific reasons that you have been impacted by any special circumstances or lead times that have caused your business loss.

Assumption

Payment A you are expecting to receive is assessable income and included in your taxable income for the year ending 30 June 20XX.

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 Paragraph 35-55(1)(c)

Reasons for decision

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to defer losses from a business activity unless:

•         you satisfy an exception or

•         you satisfy the income requirement and pass one of the four tests or

•         the Commissioner exercises his discretion.

In your situation, you do not satisfy an exception because your assessable income from other sources, that do not relate to the business activity, is greater than $40,000. Also, you do not satisfy the income requirement. You satisfy the income requirement for the income tax year if the sum of the following is less than $250,000: your taxable income, reportable fringe benefits, reportable superannuation contributions and your total net investment losses and add back your business loss. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

It is only in certain circumstances that the Commissioner has discretion to determine that it would be unreasonable for the loss deferral rule to apply. For individuals who do not satisfy the income requirement, this is where:

•         there are 'special circumstances outside the control of the business activity' which have either:

­   materially affected the business activity and prevented it from making a tax profit, or

­   extended the time within which, objectively, the business activity can be expected to make a tax profit, or

•         'because of its nature', the business activity has not, or will not produce a tax profit, and there is an objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will produce a tax profit.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides guidelines on how the discretion may be exercised. Special circumstances outside the control of the business activity include drought, flood, bushfire or some other natural disaster, such as a cyclone, hailstorm or tsunami. Circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. The special circumstances must have affected the business activity.

The phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to make a tax profit. The discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. The discretion is not intended to be available where the failure to make a tax profit is for other reasons.

In your case, you are expecting to receive a one-off payment in the income tax year ending 30 June 20XX. If you receive this payment, you will not satisfy the income requirement in accordance with subsection 35-10(2E) of the ITAA 1997. Receiving this payment will not affect your business, causing it to make a loss. There is no evidence to suggest that the reason for the loss from your activity was as a result of any special circumstances outside of your control or you were unable to produce a tax profit due to any inherent characteristics of businesses in your industry.

There is no provision in the non-commercial loss law for the Commissioner to exercise his discretion to disregard the income requirement or take some other action. Therefore, the Commissioner is unable to exercise his discretion to allow you to include any losses from your business activity in the calculation of your taxable income.