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Edited version of private ruling

Authorisation Number: 1011496930209

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Ruling

Subject: Non-commercial losses-Commissioners discretion

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 business activity in your calculation of taxable income for the 2009-10 to 2012-13 income years?

Answer

No.

This ruling applies for the following period

1July 2009 to 30 June 2010

1July 2010 to 30 June 2011

1July 2011 to 30 June 2012

1July 2012 to 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You commenced a farming business in 200X and in 200Y you expanded the business activity by leasing more property.

You invested a large sum of capital to purchase plant and equipment and fixtures and fittings to be used in the business upon its inception. You also invested further capital to replace many of these items when they were destroyed.

You employ one full-time staff member and obtain additional help via casual labour when required.

The largest costs that the business incurs are fertilizer, labour, maintenance, drench, fuel, lease payments and cartage. These expenses are common in the farming industry.

You estimate that your adjustable taxable income for the year ended 30 June 2010 and beyond will be above $250,000 for the foreseeable future.

Historically, your business operations have always met the real property test as the business leases property worth well over $500,000.

Despite what has occurred in the past, you anticipate that the business will make a tax profit in 201Z. This is based on independent assessments from the Agronomist you have used.

One of the leasehold properties was totally destroyed. Some of the stock survived and you were required to sell and relocate stock as a direct consequence of the destruction of pastures, fences and infrastructure.

The other leasehold property was also substantially damaged by the same circumstance. You estimate that approximately X% of the pastures were lost, including other assets.

The income producing capability of the business during this period has been drastically diminished as the land was so severely damaged.

The business activity satisfies one out of the four non-commercial loss tests however it has not produced a profit during its years of operation.

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the income year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2), 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.

Under subsection 35-10(1) 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 that income year unless:

Paragraph 35-55(1)(a) of the ITAA 1997, states the Commissioner may decide that the rule in subsection 35-10(2) does not apply because it would be unreasonable to do so because the business was affected by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster. The note attached to this paragraph states that paragraph 35-55(1)(a) is intended to provide for a case where a business would have passed one of the tests if it were not for the special circumstances.

Taxation Ruling TR 2007/6 at paragraph 13 states special circumstances as those that materially affect the business activity causing it not to satisfy any of the four tests in Division 35.

In your case you have passed one of the four tests. Consequently, your circumstances have not prevented you from passing one of the four tests in Division 35 of the ITAA 1997. Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) cannot be exercised.

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