Edited version of private advice

Authorisation Number: 1052240918218

Date of advice: 15 April 2024

Ruling

Subject: Commissioner's discretion - non-commercial 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 loss from your primary production business activity in the calculation of your taxable income for the 20XX financial year?

Answer

Yes.

This ruling applies for the following period:

Year ended 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Individual taxpayer.

You commenced carrying on a primary production business in the 20XX financial year.

For the 20XX financial year, while you sold approximately half of your produce at or above the cost of production in Quarter 2, extraordinary weather conditions in Quarter 3 created a market-wide collapse in confidence and saw prices for your produce plummet to XX% of those in Quarter 2.

Accordingly, you withheld from sale the rest of your produce you would typically sell, substantially reducing your 20XX financial year revenue and leading to an operating loss.

In the 20XX financial year you also had an extraordinary capital expense due to new legislation which contributed to the operating loss.

Your income for non-commercial loss purposes for the 20XX financial year is $250,000 or more.

During the 20XX financial year, you meet the Assessable income test (business activity produces an assessable income of at least $20,000) and the Other assets test (assets you own or lease with a value of at least $100,000 used in business activity).

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(i) to (iv)

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 35-55

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 a non-commercial business loss from a business activity you carried on in that year if you are an individual, unless:

•         you meet the income requirement in subsection 35-10(2E) and pass one of the four tests in subparagraphs 35-10(1)(a)(i) to (iv)

•         the exception in subsection 35-10(4) applies; or

•         the Commissioner exercises his discretion under section 35-55 to not defer the losses (subsection 35-10(1) and (2)).

Your business activity satisfies the assessable income test and the other assets test listed in section 35-10 for the 20XX financial year.

You do not meet the income requirement however as your income for the purposes of subsection 35-10(2E) for the 20XX financial year is $250,000 or more.

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 losses are therefore subject to the deferral rule under subsection 35-10(2) unless the Commissioner exercises his discretion.

For 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.

The special circumstances must be outside the control of the operators of the business activity.

Having regard to your circumstances and the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion, it is accepted that your primary production business activity was affected by special circumstances outside your control in the 20XX financial year.

The Commissioner will exercise the discretion in paragraph 35-55(1)(a) for the loss you made in the 20XX financial year.