Edited version of private advice

Authorisation Number: 1052257080150

Date of advice: 30 May 2024

Ruling

Subject: Commissioner discretion - non commercial loss

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 relevant financial year?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a primary production activity as a partner with one other.

The property you are farming on comprises over 500 hectares of land suitable for your activity.

You either sell your produce directly to a wholesale trader or consign it to produce auctions.

You commenced your primary production activity several years prior to the relevant financial year.

In the relevant financial year flood affected the profitability of your primary production activity.

Your business was impacted in the following ways:

In the relevant financial year a good part of your produce was washed out.

Your production for the following year disrupted.

You paid over $XX,XXX in expenses replacing the lost produce.

Your business made losses in the 3 financial years before the relevant financial year.

The Partnership met the Assessable income test, the real property test, and the other assets test for the relevant financial years and is expected to continue meeting these tests.

You made a loss of over $XXX,XXX in the relevant financial year and expect your business activity to return to profit in the year following the relevant financial year.

Your expenses are common to primary production activities in your industry.

You and your partner have invested heavily in improvements and necessary equipment over the past 18 months to put your primary production activity into a profitable position.

Relevant legislative provisions

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

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

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

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

Reasons for decision

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•         the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a);

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

•         the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion, and cannot be claimed until you have made a profit from your activity or passed one of the 4 stipulated tests if your income in that year is less than $250,000.

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 20YY-YY financial year, on the basis of special circumstances.

'Special circumstances' are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity, including drought, flood, bushfire or some other natural disaster.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

•         your 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 one of the four tests.

It is accepted in your case that the flood you experienced constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made.

Your business activity would still have made a loss had the special circumstances not occurred.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the year in question.