Edited version of private advice

Authorisation Number: 1052320728249

Date of advice: 18 October 2024

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

Will the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Taxpayer to include any losses from its business activity in its calculation of taxable income for the 20XX income tax year?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer is a private company incorporated in Australia.

A related entity owns and runs a specified property.

In view of climatic fluctuations, you searched for and leased another property in a different state to make your primary production business sustainable.

The Taxpayer's business activity commenced on a specified date.

The leased property was managed by the Taxpayer, where it produced, harvested and processed specified produce.

The leased property has a specified number of crops on a specified number of hectares of land located in a specified state. This property was leased from an unrelated entity.

The Taxpayer employed casual labour seasonally.

Due to heavy losses and no crops for the most recent season, you surrendered the lease.

There will be no income until another lease is taken up in the name of the Taxpayer.

The Taxpayer has not carried out any non-primary production activity after the business activity ceased.

Relevant legislative provisions

Income Tax Assessment Act Division 35

Income Tax Assessment Act subsection 35-10(1)

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

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

A non-commercial business loss is a loss you incur, either as a sole trader or in partnership, from a business activity that isn't related to your primary source of income.

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.

As set out in subsection 35-10(1) the exceptions can only apply if you are an individual, either alone or in partnership.

The Taxpayer has requested the Commissioner to exercise his discretion under subsection 35-55(1) of the ITAA 1997 in the specified income tax year.

The Taxpayer is a company operating a business.

A company is not an individual and is therefore not eligible to apply the rules in Division 35 of the ITAA 1997.

As the Taxpayer is a company and the rules in Division 35 therefore do not apply there is no discretion to consider.