Edited version of private advice

Authorisation Number: 1052160005545

Date of advice: 31 August 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 (ITAA 1997) to allow you to include any losses from your primary production activity in the calculation of your taxable income for the years ending DD MM YYYY, YYYY and YYYY?

Answer

Yes.

This ruling applies for the following periods:

Year ending DD MM YYYY.

Year ending DD MM YYYY

Year ending DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

1.    You expect that your income for non-commercial loss purposes will be $250,000 or more in the years ending DD MM YYYY, YYYY and YYYY.

2.    You carry on a primary production business of cattle breeding. The business commenced on DD MM YYYY. It is run on a station which is located in Australia. The property area is X hectares.

3.    The business started initially with a small number of cattle. You have a target breeding herd of a significantly larger number of cattle by the YYYY financial year.

4.    On DD MM YYYY you were issued with a private ruling in which the Commissioner granted his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the losses that you incurred in the consecutive years ending DD MM YYYY and DD MM YYYY to be taken into account in calculating your taxable income for each of those years, on the basis that it was 'accepted that there is a 'lead time' in the nature of your business activity, and that you will pass a test or make a tax profit within your industry's commercially viable period', being in the year (following the lead time) ending DD MM YYYY.

5.    Subsequently, on DD MM YYYY we received an application from you for a private ruling for the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years ending DD MM YYYY, YYYY and YYYY (following the initial periods for which the Commissioner's discretion was granted) on the basis of special circumstances.

6.    You meet, or expect to meet, the Assessable income test (section 35-30), Real property test (section 35-40) and Other assets test (section 35-45) under Division 35 of the ITAA 1997 for the relevant periods.

7.    The business plan for your cattle breeding business developed in FY-YYYY ('original business plan' - copy provided) has been significantly impacted by catastrophic wet seasons and flooding which have impacted the region in which your station is located starting in late summer of YYYY and continuing up until toward the end of the year ending 30 June YYYY. In particular, major flooding events in two consecutive years (the years ending DD MM YYYY and YYYY) just prior to winter and the lack of sun during this period impacted grass production.

8.    The original business plan has not significantly changed in the longer term, although there has been a requirement to react to the seasonal impacts of consecutive wet winters. This has necessitated delaying pasture remediation of acidic soils and trying to accelerate regrowth clearing on higher ground.

9.    You have provided a summary of the prior year spend against the original business plan which shows the pause in the business growth plan while you recover from the wet period.

10. You pivoted to developing contracting revenue while acquiring the capability to undertake your own regrowth clearing as well as being able to restore the drainage and levy system as your property dries.

11. You expect that in two years time that the off farm contracting revenue that you generate will increase as a result of infrastructure improvements undertaken during the time that there is dry weather.

12. You expect that following the pasture development program you have now recommenced (Y ha planted in MM YYYY) that you will be able to recommence the breeding and trading of cattle.

13. You expect that by the third year (year ending DD MM YYYY) that you will be able to return the business into profit.

Information provided

1.    You have provided information in a number of documents in relation to your application.

2.    We have referred to the relevant information within these documents in applying the relevant rules in relation to the Commissioner's discretion to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10

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

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

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

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)

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Individual A.

This is to explain how we reached our decision. This is not part of the private ruling.

Summary

It is considered your failure to achieve a profit, or expectation of a profit, in the years ending DD MM YYYY, YYYY and YYYY is due to the special circumstances envisaged under paragraph 35-55(1)(a) of the ITAA 1997. Therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) and the losses from your primary production business for the years ending DD MM YYYY, YYYY and YYYY will not be deferred under section 35-10 of the ITAA 1997.

Detailed reasoning

1.    Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

•         the exception in subsection 35-10(4) of the ITAA 1997 applies,

•         you satisfy subsection 35-10(2E) of the ITAA 1997 and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or

•         the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Business activity

2.    Your activity will only be potentially subject to Division 35 of the ITAA 1997 if it is carried on as a business. In your case, you advise that your primary production activity is carried on as a business. This ruling has therefore been determined on the basis of accepting your statement that you were carrying on a business of primary production.

Exception

3.    Under subsection 35-10(4) of the ITAA 1997, there is an exception to the general rule in subsection 35-10(2) of the ITAA 1997 where the loss is from a primary production business activity or a professional arts business activity, and the individual taxpayer has other assessable income for the income year from sources not related to that activity of less than $40,000 (excluding any net capital gain).

4.    In your case, the exception in subsection 35-10(4) of the ITAA 1997 has no application as you have stated that you do not expect to meet the assessable income requirement in any of the relevant years.

Subsection 35-10(2E) of the ITAA 1997

5.    The income requirement in subsection 35-10(2E) of the ITAA 1997 applies from 1 July 2009 and will be met where the sum of the following amounts for an income year is less than $250,000:

•         taxable income (ignoring losses subject to the non-commercial loss rules)

•         reportable fringe benefits

•         reportable superannuation contributions

•         net investment losses.

6.    You have indicated that you do not expect to satisfy subsection 35-10(2E) of the ITAA 1997 for the YYYY, YYYY or YYYY income years.

7.    Therefore, as you do not satisfy the income requirement under subsection 35-10(2E) and the exception under subsection 35-10(4) does not apply, the losses from your activities will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997 that it would be unreasonable to defer the loss.

Paragraph 35-55(1)(a) of the ITAA 1997

8.    Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise a discretion where certain special circumstances apply. Special circumstances in this context are those outside the control of the business operators, including those such as drought, flood, bushfire or some other natural disaster, that have affected that activity.

9.    Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner may decide that the rule in subsection 35-10(2) of the ITAA 1997 does not apply to a business activity if the Commissioner is satisfied that it would be unreasonable to apply that rule.

10. It is intended that the Commissioner exercise this discretion if the business would have made a profit but for the special circumstances.

11. In your case it is accepted that flood and adverse weather conditions significantly affected your business operations which has delayed the activities set out in the original business plan for your business.

12. The Commissioner accepts that your business activity was affected by special circumstances that were unusual and outside your control, namely flood and adverse weather conditions, and that in the absence of those circumstances it was probable that the business would have been, or would be, profitable for the years ending DD MM YYYY, YYYY and YYYY.

13. Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 will be granted for the years ending DD MM YYYY, YYYY and YYYY. This means that any 'loss' for that activity can be taken into account in calculating your taxable income for each of those years.