Edited version of private advice

Authorisation Number: 1052215475262

Date of advice: 30 January 2024

Ruling

Subject: Commissioner discretion - non-commercial 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 business activity in your calculation of taxable income for the 20YY-YY financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The property is a mixed business farm. You started the farming activity more than 10 years ago.

Your profitability has been impacted by flood over recent years.

During the relevant financial year your property was flooded. This was a major flood that affected the surrounding area quite severely. The flood water caused water to flow through the machinery sheds and haystacks.

The property received damage mainly to the fencing as it was washed away in the flooding. The paddocks were also damaged via water logging, which required livestock to be relocated to a neighbouring farm for a period while the fencing was repaired, and the paddock dried out.

You have provided profit and loss figures for the requested year and previous years, along with a depreciation schedule for the 20YY-YY financial year. The depreciation schedule shows a number of items being claimed in full, including cars and a motorbike. The financial figures show that in the last few financial years a loss has been made from the activity each year, including the relevant year.

You have worked as a member of the public service for several years; however, you resigned in the 20YY-YY financial year. With the resignation you were paid out a lump sum amount.

Your business losses added to your taxable income total an amount greater than $250,000 in the relevant 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

You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997, as your income was greater than $250,000. There is no discretion available to the Commissioner under the legislation with regard to a taxpayer not meeting the income requirement. Also the exception in subsection 35-10(4) of the ITAA 1997 (income not related to the primary production activity being less than $40,000) does not apply to you.

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) of the ITAA 1997 may be exercised. The special circumstances discretion may be exercised for the income year in question where your business activity is commercial, has been affected by special circumstances outside your control, and would have made a profit had it not been for the special circumstances (paragraph 13A of TR 2007/6).

'Special circumstances' are those circumstances which are sufficiently unusual or different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire, or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances (paragraphs 47 to 53 of TR 2007/6).

You said that your business activity has been affected by special circumstances. Your farm was affected by a flood event that caused damage to the property such as waterlogged paddocks and fencing needing to be repaired. These circumstances caused some of the loss through the expenses for the repairs, and being unable to work the cattle on your own land. The flood event affecting your activity constitutes special circumstances. This in itself is not sufficient for the discretion to be exercised.

There is a second part to the legislation when dealing with non-commercial losses and requesting Commissioner's discretion with special circumstances that applies to your situation. The second aspect is that the special circumstances have impacted the business activity such that the special circumstances are the cause of the business being unable to produce a tax profit, that is it was only the special circumstances which caused a loss to be made.

While the circumstances have affected your profit-making ability, the overall loss of the activity is not related to the special circumstances in itself. Looking at the information that has been provided, after taking into account expenses that may be related to the flood event, the activity would have still made a loss mainly due to the large amount of money spent on acquiring assets including cars and a motorbike, and other expenses not related to the flood event.

It has not been unusual for your activity to be in a loss situation. Upon reviewing the information that has been provided it can be noted that a tax profit has not been made from the activity in the last few years to the 20YY-YY financial year (the loss increased in the last financial year and was greater in the relevant financial year).

In circumstances where a taxpayer has utilised the temporary full expensing (TFE), and due to the value of the immediate write off of assets, has failed to make a tax profit, the Commissioner would not exercise his discretion as the taxpayer has full control of this decision. In that case the business would fail to make a tax profit due to the decision to utilise the TFE provisions and not because of circumstances outside the control of the operator. The taxpayer may choose to instead apply the general depreciation rules in Division 40 of the ITAA 1997 (Law Companion Ruling LCR 2021/3 paragraphs 86 to 90, 150, 154 and 155). The large depreciation claim resulted from a choice to purchase the items at the time and a choice to claim most of them in full in the 20YY-YY financial year. (Note that the deduction for depreciation should be apportioned to exclude any private use of the assets).

Overall, the loss is related to expenses that resulted from decisions that were within your control.

The Commissioner is unable to exercise the special circumstances discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your activity in your calculation of taxable income for the 20YY-YY financial year.