Edited version of private advice

Authorisation Number: 1052136989363

Date of advice: 14 September 2023

Ruling

Subject: Business loss

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 business activity in your calculation of taxable income for the 20XX-XX financial year?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

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 primary production business.

You operate the farm full-time and work on average 40 hours per week.

You have no employees.

You have qualifications and you are a member of several Associations.

Special circumstances impacted your business activity.

Your income / expenses were provided.

Had it not been for the special circumstances the activity would have still made a loss in the relevant financial year.

The activity has been in an overall loss situation every year since it began.

Your business activity made a profit in the financial year following the ruling application 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)

Reasons for decision

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 production business activity in your calculation of taxable income for the 20XX-XX financial year?

Summary

Having regard to your full circumstances, the Commissioner is not satisfied that your business activity would have made a profit but for the special circumstances. Consequently, the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 20XX-XX financial year.

Detailed reasoning

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, you do not satisfy the income requirement and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 20XX-XX financial 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.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss (paragraph 13A of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion). In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

•         your business activity would have made a tax profit; and

•         the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

Paragraph 129E of TR 2007/6 states:

If the facts were that the business had not made a profit in recent times, and moreover, was not reasonably expected to do so in the future, the mere fact that, for example, the business satisfied the real property test, or the other assets test, would not, in itself, indicate that it was unreasonable for losses from the business to be deferred. This would be so, even if the business activity was affected by special circumstances to some extent, but not to the extent that these circumstances caused what would otherwise be a profitable activity to be one which made a loss.

It is accepted in your case that the La Nina weather events and COVID issues affecting your business activityconstitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made.

The following considerations lead us to believe that had the special circumstances not occurred the business still would have returned a loss:

•         The activity has been in an overall loss situation every year since it began.

•         The special circumstances alone did not prevent the business activity from making a profit. After you take out the expenses that were related to the special circumstances, depreciation and other expenses your business activity would still be in a loss situation.

The Commissioner will not provide his discretion under paragraph 35-55(1)(a) of the ITAA 1997 and the losses in the 20XX-XX financial year will need to be deferred.