Edited version of private advice

Authorisation Number: 1052116278572

Date of advice: 23 May 2023

Ruling

Subject: Commissioner's discretion - non-commercial loss

Question

Will the Commissioner exercise the discretion under subsection 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include current year losses from your animal husbandry business activity in your taxable income for the relevant financial year?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

18 May 20XX

Relevant facts and circumstances

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

You carry on an animal husbandry activity.

Your activity was impacted during the relevant financial years in the following ways:

•         You have purchased more animals

•         Sale prices have dropped following your purchase, and you have supplied a graph showing declines in sale prices

•         Interest rates have risen, and you have supplied a copy of your bank statement showing your current fixed interest rate. You think this will rise significantly on an upcoming annual review

•         You are predicting a loss for this business activity in the relevant financial year.

You are claiming that the falling sale prices and rising interest rates are special circumstances and that they are out of your control as you weren't expecting these things to happen.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-55(1)

Income Tax Assessment Act 1997 subsection 35-10(4)

Reasons for decision

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•         the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a));

•         an exception in subsection 35-10(4) applies; or

•         the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

In your situation, none of the exceptions would apply as you do not meet the income requirement. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

For individuals who do not satisfy the income requirement or don't pass any of the four tests, you must:

•         defer the loss, or

•         you can apply for the Commissioner's discretion in limited circumstances.

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the relevant year on the basis of special circumstances.

'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.

Taxation Ruling TR 2007/6 Income Tax: non-commercial business losses: Commissioner's Discretion (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.

Paragraphs 47 and 48 of this ruling note these special circumstances are outside an operator's control, and ordinary economic and market fluctuations are not included as they are expected to occur on a regular or recurrent basis and affect all businesses within an industry. The variations in sale prices and interest rates you have experienced are within the range of previous fluctuations and are not seen as special circumstances for which the Commissioner may exercise his discretion.

For the Commissioner to exercise the discretion they must be satisfied that where a business activity has been affected by special circumstances outside the control of the operators of that activity, had these circumstances not existed, the activity would have satisfied one of the four tests in Division 35, or made a tax profit.

In your case, you have recently increased the number of animals in your care but are faced with falling sale prices and rising interest rates leading to a possible loss for the relevant financial year. You believe these are special circumstances and that they are outside of your control. You have requested the Commissioner exercise his discretion under Subsection 35-55(1) of the ITAA 1997 and allow you to claim the losses you anticipate against your other income because of these special circumstances.

While we appreciate your situation, it is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Market fluctuations and interest rate variations are not unusual or out of the ordinary and are known risks within the industry you are engaged in. These fluctuations are expected to occur in this industry and are usually managed through business practices such as planning and risk management. Choosing to take on extra animals is a business decision with associated risks.

As these choices are within your control the anticipated loss would not be due to special circumstances such as those given in the legislation. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. The losses from your animal husbandry activity cannot be used against your other income in the relevant financial year. The losses will be carried forward to be offset against later years where there is a profit from your business activity if you meet the requirements in Division 36 to be able to claim the deferred losses in a later year.