Edited version of private advice

Authorisation Number: 1052127024802

Date of advice: 9 June 2023

Ruling

Subject: Commissioner's discretion - non-commercial business losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include the loss from your primary production business activity, in the calculation of your taxable income for the year ended 30 June 20XX?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a partner in a livestock production business.

The property that you own and use to carry out your business activity has a value of at least $XXX.

The assets that you own and use in your business activity have a value of at least $XXX.

As shown in the partnership's financial statements, the business activity has produced assessable income of at least $XX for the 20XX income year up to and including the 20XX income year.

Your business has been impacted in recent times by drought and flood resulting in high input prices.

The two main inputs to the business are fodder (grain and hay) and cattle. Fodder accounted for approximately XX% of the operating expense in the 20XX income year.

The cost of fodder was up XX% on the previous year for feeding a similar number of cattle during the year.

The cost of cattle purchased during the 20XX income year was up by approximately XX% on the 20XX income year.

You have exceeded the $250,000 non-commercial loss income threshold in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 34-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection35-10(4)

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 section 35-40

Income Tax Assessment Act 1997 section 35-45

Income Tax Assessment Act 1997 section 35-55

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

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision

Summary

The Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include the loss from your primary production business activity in the calculation of your taxable income for the year ended 30 June 20XX.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997.

Division 35 applies to defer losses from non-commercial business activities unless:

•         you meet the income requirement in subsection 35-10(2E) and you pass one of the four tests referred to in subparagraphs 35-10(1)(a)(i) to (iv)

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

•         the Commissioner exercises discretion under section 35-55 to not defer the losses (subsection 35-10(1) and (2)).

You do not meet the income requirement as your income for the purposes of subsection 35-10(2E) for the most recent income year ending before your application was made is not less than $250,000. The exception in subsection 35-10(4) does not apply to you as your assessable income for the 20XX income year from other sources not related to your primary production business is more than $XX.

Your business loss is therefore subject to the deferral rule under subsection 35-10(2) unless the Commissioner exercises discretion.

Where you do not satisfy the income requirement in subsection 35-10(2E), paragraph 35-55(1)(a) provides that the discretion may be exercised for the income years in question where the Commissioner is satisfied that the business activity was affected in one or more income years by special circumstances outside the control of the operators of the 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 provides guidelines on how the discretion in subsection 35-55(1) may be exercised.

Paragraph 54 of TR 2007/6 states that the use of the word 'including' in paragraph 35-55(1)(a) indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, 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.

Having regard to your circumstances and the principles set out in TR 2007/6 it is accepted special circumstances prevented you from making a tax profit in the 20XX income year.

Consequently, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) to allow you to include the loss from your primary production business activity in the calculation of your taxable income for the year ended 30 June 20XX.