Edited version of private advice

Authorisation Number: 1052196065355

Date of advice: 23 November 2023

Ruling

Subject:Non-commercial losses - special circumstances - more than $250,000

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 period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You commenced operating a primary production business in partnership with your spouse in the 20XX income year.

You own a property on which you conduct your business activity.

When you purchased the property it was run down.

You and your spouse have made significant investment to improve the productivity of the farm by sinking water bores, improving the soil quality, purchasing equipment to enable efficient farming practices and remove the need for the use of contractors.

Floods in the 20XX calendar year prevented some of your main business activity happening in the 20XX income year; stopped movement of produce in or out of your property and stopped you and contractors being able to complete other scheduled activities; putting your business in a loss position.

Your income from sources other than the primary production business was more than $250,000 in the 20XX income year.

You met the Assessable income test, the Real property test and the Other assets test for the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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 subsection 35-55(1)

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

Reasons for decision

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

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

•                     you satisfy the income requirement in subsection 35-10(2E) and 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 the discretion in subsection 35-55(1).

In your case, you do not satisfy the income requirement as your income for the purposes of subsection 35-10(2E) for the 20XX income year is not less than $250,000. The exception in subsection 35-10(4) does not apply as, while your activity is a primary production business, your assessable income from other sources is not less than $40,000.

Your business loss for the 20XX income year is therefore subject to the deferral rule in subsection 35-10(2) unless the Commissioner exercises the discretion.

Where you do not meet the income requirement in subsection 35-10(2E), paragraph 35-55(1)(a) provides that the discretion may be exercised for the relevant income year/s where the Commissioner is satisfied that the business activity was affected by special circumstances outside the control of the operators, 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 13A of TR 2007/6 states that special circumstances are those which have materially affected the business activity, causing it to make a loss.

Individuals (alone or in partnership) who do not meet the income requirement need to demonstrate that their business is commercial and has been affected by special circumstances (Paragraph 41B of TR 2007/6).

For a business activity to be regarded as 'commercial' for the purposes of Division 35 at least one of the four objective tests must be satisfied; or would have been satisfied but for the special circumstances (Paragraph 41C of TR 2007/6).

The four objective tests are:

•                     assessable income test (section 35-30)

•                     profits test (section 35-35)

•                     real property test (section 35-40)

•                     other assets test (section 35-45)

In your case, your business activity satisfies three of the four tests and is therefore regarded as commercial. Floods in 20XX prevented you from being able to conduct or complete certain business activity in the 20XX income year; causing your business to make a loss.

Conclusion

Having regard to your circumstances and the principles set out in TR 2007/6 it is accepted that the 'special circumstances limb' in paragraph 35-55(1)(a), is satisfied.

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