Edited version of private ruling

Authorisation Number: 1011481273848

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Non Commercial Losses- Commissioner's discretion - Special circumstances.

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 mixed farming activity in your calculation of taxable income for the 2009-10 and 2010-11 income years?

Answer: No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 1985

Relevant facts and circumstances

You are conducting a mixed primary production activity in partnership. The partnership has been in business for over 20 years.

The crops produced are sold to merchants in the relevant industries.

You expected to generate a profit in the 2009-10 income year, however due to the prolonged unavoidable circumstances this forecast is unlikely to be achieved. Therefore, the financial performance of the business activity has been poor.

You expect to be commercially viable and profitable once the prolonged unavoidable circumstances in the region return to normal.

The independent evidence you have provided states that your region was affected by the unavoidable circumstances since mid 2002 year.

You have provided the relevant documents in relation to your primary production activity.

In a telephone conversation with the ATO your Tax Agent advised that the forecast income for the 2010-11 income year is in excess of $ 20,000.

As at 30 June 2009 you had business tax losses to be carry forward. You are seeking to deduct these losses against your salary income received in the 2009-10 income year.

You have advised that you did not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 in the 2009-10 income year and will not satisfy the income requirement in the 2010-11 income year.

Therefore, you have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the mixed farming activity for the 2009-10 and 2010-11 income years.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 paragraph 35-10(2).

Income Tax Assessment Act 1997 paragraph 35-10(3).

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

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

In broad terms, the tests require:

(a) at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)

(b) the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

(c) at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or

(d) at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

In the context of section 35-35 of the ITAA 1997 ((b) above), a 'taxation profit' for the income year in question is where the amount of assessable income from the business activity for that year, is greater than the sum of the deductions attributable to it for that year (apart from the operation of subsection 35-10(2) of the ITAA 1997).

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain tests) in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

The income requirement in subsection 35-10(2E) of the ITAA 1997 is satisfied if the sum of the following is less than $250,000:

(a) your taxable income for that year;

(b) your reportable fringe benefits total for that year;

(c) your reportable superannuation contribution for that year;

(d) your total net investment losses for that year.

In your case you do not satisfy the income requirement as your income is above $250,000.

Your mixed farming activity will only be potentially subject to these provisions if it is carried on as a business. The Commissioner is satisfied that your activity is carried on as a business.

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of the Commissioner's discretion as follows:

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters.

It can be seen that to determine what is 'special circumstances', we need to look at the context in which the phrase is used. Also, it is clear that 'special circumstances' will be something out of the ordinary or unusual. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. For this to be the case, it will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has resulted in the business activity failing to pass a test. Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by 'special circumstances' in the sense in which this term is used in paragraph 35-55(1)(a), as the Note to the paragraph indicates.

For the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity will be affected in the year(s) by the special circumstances.

The evidence you have provided confirms that the primary production activity was affected by unavoidable circumstances since mid 2002 year.

Paragraph 13 of the Taxation Ruling TR 2007/6 reads 'Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35'.

The income and expense statements you have provided shows that your income from the activity has been in excess $20,000 in the 2009-10 income year. You have advised that the income is expected to be in excess of $ 20,000 in the 2010-11 income year. This indicates that the above stated conditions have not affected your activity in terms of its income.

The unavoidable circumstances have not affected your mixed primary production activity causing it to not satisfy the assessable income test in section 35-30 of the ITAA 1997.

Accordingly, it would be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your business activity for the 2009-10 and 2010-11 income years.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 and 2010-11 income years on the basis that it is not accepted that your activity has been affected by unavoidable circumstances in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

For the 2009-10 and 2010-11 income years the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your mixed farming activity. A deferred loss is not disallowed and will be deductible against any taxation profit from your mixed primary production activity, or similar business activity, in the future years.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).