Edited version of private advice

Authorisation Number: 1052177709023

Date of advice: 9 October 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 losses from your business in the calculation of your taxable income for the income years ended 30 June 20XX and 30 June 20XX?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You operate a commercial mixed farming activity.

The business is conducted by you and your partner working full-time in a 50-50 partnership (the Partnership).

The Partnership conducts their business on land jointly owned by the Partners (on a 50-50 basis).

On 30 June 20XX, the business activity was carrying XX head of sheep and XX head of cattle. The carrying capacity increased to XX head of sheep and XX head of cattle on 30 June 20XX.

Plant and equipment have a cost in excess of $100,000 as of 30 June 20XX.

The Partnership derived income from sales in excess of $20,000 in 20XX, 20XX and expects to do so in 20XX.

During the 20XX income year, the business expanded by purchasing additional farmland, plant and equipment, and livestock.

In the 20XX and 20XX income years, planned seasonal crops were unable to be sown or harvested due to the saturated ground.

The loss of tax profit attributed to the flood event caused reduced livestock and crop sales and unexpected costs of maintaining a larger stock holding significantly reduced the 20XX tax profits resulting in a tax loss for the Partnership in 20XX.

A return to tax profit is expected in the 20XX income year as the crop yield is expected to be XX in sales, in addition to livestock and wool sales.

Your income for the 20XX income year and expected income for the 20XX income year for non-commercial loss purposes is more than $250,000.

You provide that your business activity produces assessable income of at least $20,000.

The property used for your business activity has a value of at least $500,000.

The assets you use for your business activity has a value of at least $100,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

Income Tax Assessment Act 1997 paragraph 35-10(1)(a)

Income Tax Assessment Act 1997 paragraph 35-10(1)(b)

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

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

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

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 subsection 35-40(1)

Income Tax Assessment Act 1997 subsection 35-45(1)

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)

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

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

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

Where an individual has a business loss, Division 35 needs to be considered. Division 35 applies to losses from certain business activities.

Subsection 35-10(1) states that:

(1)          The rule in subsection (2) applies for an income year to each business activity you carried on in that year if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), unless:

(a)          you satisfy subsection (2E) for that year, and one of the tests set out in any of the following provisions is satisfied for the business activity for that year:

                                           (i)                section 35-30 (assessable income test);

                                          (ii)                section 35-35 (profits test);

                                         (iii)                section 35-40 (real property test);

                                         (iv)                section 35-45 (other assets test); or

(a)          the Commissioner has exercised the discretion set out in section 35-55 for the business activity for that year; or

...

Subsection 35-10(2) states that:

Rules

(2)          If the amounts attributable to the *business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess:

(a)          were not incurred in that income year; and

(b)          were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on.

...

Subsection 35-10(2E) provides that:

Income requirement

(2E) You satisfy this subsection for an income year if the sum of the following is less than $250,000:

(a)          your taxable income for that year, disregarding your *assessable FHSS released amount for that year;

(b)          your *reportable fringe benefits total for that year;

(c)          your *reportable superannuation contributions for that year;

(d)          your *total net investment losses for that year.

For the purposes of paragraph (a), when working out your taxable income, disregard any excess mentioned in subsection (2) for any *business activity for that year that you could otherwise deduct under this Act for that year.

...

Section 35-30 states:

Assessable income test

The rules in section 35-10 do not apply to a *business activity for an income year if:

(a)          the amount of assessable income from the business activity for the year; or

(b)          you started to carry on the business activity, or stopped carrying it on, during the year-a reasonable estimate of what would have been the amount of that assessable income if you had carried on that activity throughout the year;

is at least $20,000.

...

Section 35-40(1) states:

Real property test

(1)  The rules in section 35-10 do not apply to a *business activity for an income year if the total *reduced cost bases of real property or interests in real property used on a continuing basis in carrying on the activity in that year is at least $500,000.

...

Subsection 35-45(1) states:

Other assets test

(1)          The rules in section 35-10 do not apply to a *business activity for an income year if the total values of assets that are counted for this test (see subsections (2) and (4)) and that are used on a continuing basis in carrying on the activity in that year is at least $100,000.

...

Special circumstances

Paragraph 35-55(1)(a) states that:

(1)          The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a *business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a)          the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

...

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) provides guidelines on how the discretion in subsection 35-55(1) may be exercised.

Paragraphs 13A and 14 of TR 2007/6 states:

13A. For those individuals who do not satisfy the income requirement in subsection 35-10(2E) special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year(s) in question where:

•                    but for the special circumstances, the 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 at least one of the four tests.

14. The special circumstances must be outside the control of the operators of the business activity. Such circumstances are specifically defined to include drought, flood, bushfire or some other natural disaster. In the case of other events, failure for no adequate reason to adopt practices commonly used in an industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator.

...

Application to your circumstances

You do not meet the circumstances under subsection 35-10(2E) because your taxable income for the 2022 income year and estimated income for the 2023 income year is greater than $250,000.

As you do not satisfy the income requirement in subsection 35-10(2E) special circumstances are those which have materially affected your business activity, causing it to make a loss. In your case, the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year(s) in question where:

•                     but for the special circumstances, the 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 at least one of the four tests.

In your case, you do satisfy:

•                     the assessable income test in section 35-30 as the business activity was at least $20,000,

•                     the real property test in section 35-40 as the real property owned in the business activity is greater than $500,000, and

•                     the other asset tests in section 35-45 as the assets owned and used in the business activity has a value of at least $100,000.

Paragraph 35-10(1)(b) provides that the Commissioner can exercise the discretion set out in section 35-55 for the business activity for that year. Paragraph 35-55(1)(a) provides that the Commissioner can exercise the discretion not to apply the non-commercial loss deferral rule in subsection 35-10(2) where the special circumstances discretion applies.

Paragraph 14 of TR 2007/6 provides that the special circumstances outside the control of a business operator would include natural disasters like a flood.

In this case, it is accepted that the floods significantly affected your primary production activities in the income years ended 30 June 20XX and 30 June 20XX.

The Commissioner accepts that your business activity was affected by special circumstances that were outside your control being the floods.

The Commissioner also accepts that, in the absence of those circumstances a taxable profit would have been made in the income years ended 30 June 20XX and 30 June 20XX.

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