Edited version of private advice

Authorisation Number: 1052370642309

Date of advice: 24 April 2025

Ruling

Subject: NCL discretion

Question 1

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 primary production business activity in your calculation of taxable income for the 20XX-XX financial year?

Answer 1

No

This private ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

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 mixed farming business.

The property is leased.

There were significant input costs before any income was realised.

In addition to farming, you were also engaged in other employment during the relevant financial year.

You advised that drought impacted your business activity in the relevant year. You provided reports generated by the Department of Agriculture, Fisheries and Forestry which demonstrated your location had experienced rainfall deficiency at 5 per cent or lower of normal rainfall levels.

You advised there were expenses incurred that were related to the drought. You said that the main additional cost incurred due to the drought was for fodder.

You expect your business activity to make a profit in the next financial year.

The financial information for the business, and the quantity of stock were provided for the previous years, the relevant financial year, and the following financial year. It showed an overall financial loss in all of the previous years and the relevant financial year, due to high expenses that were mainly not related to the special circumstances. Also, a list of assets purchased in the relevant financial year was provided with the cost of them. Asset expenditure and depreciation expenses were high for the relevant financial year.

Livestock numbers and hectares of crops plantedinformation was provided.

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

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 20XX-XX financial year?

Summary

Having regard to your full circumstances, the Commissioner is not satisfied that your business activity would have made a profit but for the special circumstances. Consequently, the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 20XX-XX financial year.

Detailed reasoning

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.

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

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion sets out when the Commissioner may exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The intention of the discretion was not where a 'business activity makes a loss because of factors which can apply to any business' (paragraph 10 of TR 2007/6). The discretion is for a commercial business activity that fails to satisfy any of the tests due to 'certain reasons outside the control of the operator' (paragraph 11 of TR 2007/6).

If your business activity would have made a loss even if it had not been affected by special circumstances, it is unlikely that it would be considered unreasonable for the loss deferral rules to apply and the Commissioner is unlikely to exercise the discretion (paragraph 50 of TR 2007/6). If you do not meet the income requirement and your activity would have made a loss even if it had not been for the special circumstances, it is unlikely that the Commissioner would exercise the discretion (paragraph 50A of TR 2007/6.

The example 7A18A that begins at paragraph 129A of TR 2007/6 demonstrates when the Commissioner may and may not exercise the discretion:

129A. Alister carries on a business of breeding cattle for sale and has done so for the past 20 years. In prior years this business activity has been very profitable. However, in the 2010 income year it was affected by drought, which caused Alister to spend much more than anticipated on fertilizer and seed to maintain the condition of his pastures. The drought also affected the average sale price per head Alister could obtain for his cattle. A large loss was made from the business for the 2010 income year.

129B. Alister did not meet the income requirement (subsection 35-10(2)(E)) for the 2010 income year. Therefore, the fact that his business activity satisfied both the assessable income and profits test for this year does not automatically mean that the loss deferral rule in subsection 35-10(2) does not apply. This is due to the change in paragraph 35-10(1)(a), and the introduction of subsection 35-10(2)(E) (the income requirement). He applies for the Commissioner to exercise the discretion under the special circumstances limb in paragraph 35-55(1)(a), and decide that the loss deferral not apply.

129C. Alister's application shows that special circumstances outside of his control, in the form of the drought, caused his business activity to make the loss in question, where, but for those circumstances a profit would have been made.

129D. The Commissioner notes the inherent profitability of the business, as borne out by its strong past performance in this respect. He concludes that, while the factors in paragraph 35-10(1)(a) are not directly to be applied, the fact that the business continues to satisfy the assessable income test and the profits test points towards it being 'commercial' in the sense indicated by the scheme of Division 35. The Commissioner concludes that it would be unreasonable in these circumstances for the loss to be deferred and exercises the special circumstances limb of the discretion.

129E. If the facts were that the business had not made a profit in recent times, and moreover, was not reasonably expected to do so in the future, the mere fact that, for example, the business satisfied the real property test, or the other assets test, would not, in itself, indicate that it was unreasonable for losses from the business to be deferred. This would be so, even if the business activity was affected by special circumstances to some extent, but not to the extent that these circumstances caused what would otherwise be a profitable activity to be one which made a loss.

It is accepted that droughtconstitutes 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.

Would a profit have been made but for the special circumstances?

The following considerations lead us to believe that had the special circumstances not occurred the business activity would still have been in a loss situation:

Since commencement, while the assessable income test was satisfied each year, the expenses have always exceeded income, the farm activity has never made a profit since commencement. If not for the drought the evidence supports that you still would have made a loss due to very high expenses as has occurred in previous years.

You advised that an increased fodder expense was the main cost incurred due to the drought. You advised there were expenses incurred that were related to the drought. There were however high expenses incurred that are not related to the special circumstances. Asset expenditure and depreciation expenses were also high in the relevant financial year.

As per your latest financial figures there was an overall loss from the activity which resulted from large expenses. Considering these expenses, that are not directly related to the drought, which have increased the loss such that, had it not been for the drought, you would still not have made a profit.

Changes in the average sale price in the primary production market is an expected event in this industry, and not a special circumstance.

The changes in income across the years resulted from individual business decisions that were made.

Conclusion

For the Commissioner to exercise the discretion under special circumstances, he needs to be satisfied that the special circumstances have materially affected the business activity, causing it to make a loss. Your financial data provided does not indicate that the loss was mainly caused by the drought, rather it was caused by individual business decisions, and subsequent high expenses.

Based on the information provided and your statements, you have made business decisions to operate the farm activity incurring a significant loss. These business decisions have led to the farm activity incurring a significant loss every year since commencement.

The Commissioner is not satisfied that your activity would have made a profit but for the special circumstances. Accordingly, the Commissioner cannot exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the loss for the farm activity. Any 'loss' for that activity cannot be taken into account in calculating your taxable income for the certain financial year.

As a result, you cannot claim losses from your farm activities against your other income. The losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. That is, the losses from in the stated income year will be carried forward to be offset in later years when there is a profit from your business activity or if you meet the requirements in Division 35 of the ITAA 1997 to be able to claim the deferred losses in a later year.