Edited version of private ruling

Authorisation Number: 1011584297744

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Ruling

Subject: Non-Commercial Losses Special Circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include a share of losses from your primary production business in the calculation of your taxable income for the 2009-10, 2010-11 & 2011-12 income years?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2001

Relevant facts

You operate a primary production business.

You planted trees and are expecting to start producing in the 2011-12 income year.

The business is operated by a number of full time staff and many more casual staff at any one time.

The property is irrigated via water allocations from a local river.

Water allocations were reduced by water authorities due to the ongoing drought. In response to the lowering of the water allocation for the 2007-08 income year you purchased additional permanent water rights and also temporarily leased water. You were attempting to ensure that the farm definitely had enough water if there were further, more severe cuts in the future because if you didn't have enough water the trees would have died which would have ruined your business. In the 2008-09 income year, you purchased an additional amount of permanent water entitlements in response to uncertain water allocations at the time. The funds required to buy these entitlements were borrowed from the bank and therefore you have ongoing interest repayments which have further affected the profitability of the business.

Due to the drought and reduced water allocations, the trees and produce were damaged to such an extent that the customer refused to take the produce. The produce which was able to be sold was done so into a very depressed market due to an overabundance of that produce.

The business was expecting to make a profit in 2010-11 income year, however due to continued new plantings, you are not expecting a profit for another 3 years.

Your income for non-commercial loss purposes is more than $250,000.

According to the Department of Industry and Investment (Primary Industries) your region has been drought declared for 45 of the last 48 months and has been marginal for the 3 remaining months.

Over the last three financial years you have been involved in various activities on the farm. From information supplied you have received income from produce sales along with income from other sources such as livestock trading & contracts received. You have incurred expenses in relation to the above activities and also from your trees (which were planted in 2008) during those years. Your expenses during that period have not been allocated to particular activities but have been banded together with all other expenses against all income. You have not made a tax profit during the last three financial years. You have indicated that you did not expect to make a profit until the 2010-11 income year however, due to continued new plantings and the on-going drought you do not expect to make a tax profit until the 2012/13 income year.

Assumptions

It is assumed that you will not pass the income requirement in the 2010-11 and 2011-12 income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2)

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

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 first 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 www.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-avoidance rule for income tax.

Reasons for decision

Summary

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10, 2010-11 & 2011-12 income years on the basis that it is accepted that the drought is a special circumstance in the sense in which this term is used in Division 35 of the ITAA 1997.

The Commissioner is therefore satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your business activity. This means that any loss for your business activity can be taken into account in calculating your taxable income for the 2009-10, 2010-11 and 2011-12 income years.

Detailed reasoning

You have not satisfied the income requirement as your relevant income has exceeded $250,000. Therefore the loss from your activity in the 2009-10 income year and the expected loss from your activity in the 2010-11 & 2011-12 income years will not be taken into account unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997.

To apply the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity was affected in the relevant year by special circumstances.

Your business activity was affected by the drought and exacerbated by reductions in held water allocations and as a result the customers refused to buy your produce, due partly to a world-wide overabundance of produce but mainly because the produce was damaged because of lack of water. You were also forced to temporarily lease additional water rights to keep your trees alive.

Information from the Department of Industry and Investment (Primary Industries) indicates that your region (in which the farm is situated) has been drought declared for 45 of the last 48 months. Unfavourable weather conditions leading to drought was outside your control and therefore it is accepted as a special circumstance as this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

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