Edited version of private advice

Authorisation Number: 1052403408140

Date of advice: 02 July 2025

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question 1

Will the Commissioner exercise the discretion under section 35-55 of the Income Tax Assessment Act 1997 to allow you to include any losses from your primary production business activity in the calculation of your taxable income for the 20XX to 20XX financial years?

Answer 1

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

A primary production activity is carried out at a property.

The property was acquired several decades ago and has been owned and operated by multiple generations of a family.

A mixture of varieties of the crop are grown on the property.

Due to market changes a choice was made to decrease the amount of one of the crops and plant different crop varieties.

You stated that you receive partnership income from the primary production income.

The decision was made to switch varieties, before the partnership was stated to have begun.

The planting of the new crop took place during the year ended 30 June 20XX.

The ABN that you stated was for the partnership belongs to a registered company entity.

You stated that the company and partnership use the same business name and for commercial purposes the partnership uses the same ABN.

The profit and loss statement that has been supplied also has no connection to the partnership or the company as these records are for a second company, which is not registered for an ABN.

The partnership you are a partner of was recently registered with the ATO with the start date backdated.

You have been unable to explain how the partnership is related to the company.

The partnership is not registered for an ABN.

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)(c)

Reasons for decision

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents losses from a non-commercial business activity carried out by a taxpayer (alone or in partnership) from being offset against other assessable income in the same financial year, unless:

•                     The taxpayer's income for non-commercial loss purposes is less than $250,000 and the business activity meets one of the four required tests.

•                     The exception in subsection 35-10(4) applies for the relevant income year.

•                     The Commissioner exercises discretion under subsection 35-55(1) to allow the losses to be offset.

Based on the information provided, there is no entitlement to Division 35 under the ITAA 1997, as no business activity is being carried out by an individual or a partnership.

The details supplied indicate that the primary production activity is carried on by a company.

Additionally, there is no evidence to substantiate a loss incurred by the you. The profit and loss statement shows a loss made by another company, an entity not registered for an ABN.

Since Division 35 applies only to non-commercial losses incurred by individuals, you have no eligible business activity or financial loss that meets the criteria for loss deferral under this division.

Given the information provided, you do not meet the conditions for loss deferral under Division 35 of the ITAA 1997. As the business is structured as a company, it falls outside the scope of Division 35, which applies to individual taxpayers.

Furthermore, the Commissioner's discretion under subsection 35-55(1) does not apply in this case, as there is no evidence of an individual business activity or any financial loss attributable to the taxpayer that would justify exercising discretion.

Accordingly, the claimed loss cannot be offset against the individual taxpayer's assessable income, and no further action can be taken under Division 35.

In the case where you were carrying on a business activity as an individual or in a partnership, the Commissioner will not exercise the discretion in section 35-55 of the ITAA 1997, as the reason the business made a loss was not due to something inherent to the nature of the business, but a choice to change crop varieties.

The meaning of 'because of its nature' is discussed Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion. Paragraph 17 states for the failure to satisfy a test or produce a tax profit (subparagraph 35-55(1)(c)(i)) to be 'because of its nature', the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type (see Federal Commissioner of Taxation v. Eskandari (Eskandari)).

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a tax loss in a year, is because of something inherent to the nature of the business and not something peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or choices made by you.

In Case 1/2013 2013 ATC 1-050; [2013] AATA 3, the Administrative Appeals Tribunal (AAT) determined that a taxpayer who staggered the planting of their vineyard over several years was not eligible for the discretion. The AAT accepted that while it may have been commercially prudent to adopt the staggered approach, it was not sufficient to meet the test outlined in paragraph 35-55(1)(c). The AAT determined that the staggered approach was the taxpayer's choice, and not the result of an inherent characteristic the business activity had in common with other businesses within the industry (in line with Eskandari 134 FCR 569).

Further at paragraph 77 of TR 2007/6, which provides 'Therefore, the phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons.'

In relation to your circumstances the primary production activity has been in operation for over twenty years harvesting and selling crop varieties during that period. While the planting of the new crop varieties did not take several years, the business had the knowledge and understanding of the time required to procedure a harvest from the new crop. The business maintained a large percentage of the current crop variety to produce and sell using their reputation.

It was a choice to plant several new varieties of crops and not something that is inherent to the nature of the business.