Edited version of private advice

Authorisation Number: 1052286351515

Date of advice: 18 September 2024

Ruling

Subject: Non-commercial loss - special circumstances

Question 1

Will the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA1997) to find that the rule in subsection 35-10(2) does not apply to the business activity of the taxpayer for the 2023 income year because the Commissioner is satisfied that it would be unreasonable to apply that rule as the business activity was affected by special circumstances outside the control of the taxpayer?

Answer 1

No. The Commissioner will not exercise his discretion to allow you to include any losses from your business activity in your calculation of taxable income for the 20XX income year.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A was a sole trader and operated a primary production business from the 20XX income year until their death on 19 October 20XX.

The farmland (farm) where the primary production business was held by is owned by Company B ATF "XYZ Family Trust."

The farm comprises of land being XX hectares which was purchased by Company B in 20XX for $XX (which includes a residential dwelling) and 309 hectares which was purchased on 20XX for $XX.

Person A leased the farm from the XYZ Family Trust for a market value rent.

The main business activities carried out on the property was sheep and cattle farming. The business also derived other income from agistment and the sale of wool and crops.

Prior to Person A becoming unwell, Person A ran the day-to-day operations of the primary production business located at the farm.

Person A was responsible for the supervision of farm operations that were being carried out by contracted farmhands and suppliers. These included:

•                     Paddock and fencing maintenance

•                     Medical treatment and scanning of livestock

•                     Sheep shearing

•                     Sowing, fertilising, spraying and harvesting of crops

•                     Undertaking training courses to obtain the knowledge and skills necessary for running an agricultural business, including:

•                     Agricultural drone operation including analysis of data collected from drones to monitor livestock and crops

•                     Side-by-side farm vehicle operation

•                     AgriWebb farm management software including online tutorials

•                     Analysis and making managerial decisions on livestock, wool and crops based on market trends and agricultural knowledge

•                     Entering contracts and facilitating transactions related to agistment and the purchase and sale of livestock, wool and crops.

•                     Liaising with suppliers and arranging payment of tax invoices

•                     Attending to the bookkeeping of farm operations and liaising with tax agent for the preparation and lodgement of quarterly Business Activity Statements and year-end financial accounts.

Income and expenses were provided as part of the application.

A profit has not been evident since the beginning of the farming operation.

Person A's father passed away in May 20XX. Person A inherited shares from her father's estate. The shares included those in ASX-listed companies and a private company owned by her late father.

Person A received a franked dividend of $1 million on 17/10/20XX (two days prior to her date of death) from the private company owned by her late father.

The receipt of the franked dividend has resulted in Person A being unable to satisfy the $250,000 income requirement (s 35-10(2E) of ITAA1997).

On 22 February 20XX, Person A was admitted into a private hospital for surgery.

On 27 February 20XX, Person A was released from hospital to return to their residence in metropolitan Sydney.

On 1 March 20XX, a pathology report was issued advising of the medical condition.

A Mobility Parking Scheme Application dated 24 August 20XX with accompanying letter from Person A's doctor to the Department of Transport NSW, lists the taxpayers residence as metropolitan Sydney.

A death certificate was provided as part of the application with the certificate dated X November 20XX.

The diagnosis of the malignant brain tumour was outside of Person A's control.

Person A worked in Sydney in a part-time role for salary and wages each morning and in the afternoon, from her residence, she would work on farm duties, such as having phone calls with farmhands and trades whilst looking after any bookkeeping issues, such as paying invoices.

For a period of four months commencing June 20XX, Person A stayed at the farm to be able to delegate and organise works being carried on the manager's cottage and farm related duties.

After that time, Person A would visit the farm 2 times a month and would be there 3 to 4 days at a time due to the travel time not being feasible for short term visits.

Relevant legislative provisions

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

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

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

Income Tax Assessment Act 1997 (ITAA 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 did not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 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.

The sum of the required elements for calculating your income was more than $250,000, due to you receiving extra and unexpected income in the form of franked dividends from your father's estate. There is no discretion available to the Commissioner in the legislation in circumstances where the income requirement is not met, even if it was beyond the taxpayer's control.

Receiving the payments did not affect the business activity, causing it to make a loss. Instead, it caused you to not satisfy the income requirement measure under subsection 35-10(2E) of the ITAA 1997.

Special circumstances

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 20XX-XXincome 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.

Paragraph 43 states there is: no exhaustive definition of 'special circumstances' is provided in the ITAA 1997. However, the term has received considerable judicial consideration in respect of other legislation.

The Commissioner's approach to exercising the discretion under section 35-55 of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion (TR 2007/6). The following has been extracted from paragraphs 48 to 53 of this ruling:

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

Paragraph 12 states:

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a tax profit is inherent to the nature of the business and is not peculiar to your situation.

You provided financial reports showing income statements and profit and loss for the 2020, 2021, 2022 and 2023-income years. Each income year resulted in a loss.

Paragraph 20 states:

The Commissioner must be satisfied that an objective expectation exists, for each of the year(s) in question, that the business activity will satisfy a test or produce a tax profit within a period that is commercially viable for the industry concerned. The objective expectation must be based on independent information, where such information is available.

Whilst Person A's diagnosis and subsequent passing was out of their control, the fact that the business activity never resulted in a profit during the whole time it was operated cannot be overlooked. As mentioned above, Person A lived in Sydney full time where she ran the farm remotely by telephone where she communicated with paid contractors who ran the farm in her absence. Person A did visit the farm to conduct some work, but not to the extent where it is considered to be full-time. There was only a small period of time each month that Person A attended the farm.

Conclusion

Having regard to your full circumstances, it is not accepted that Person A's diagnosis and subsequent passing that has prevented the business from making a tax profit. The business had not made a profit since it started operations.

The Commissioner will not exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the 20XX-XX income year. The loss cannot be utilised in the 20XX income year.