Edited version of private ruling

Authorisation Number: 1011588292654

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Ruling

Subject: Commissioner's Discretion - Special Circumstances and Nature of the Activity

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 business activity in your calculation of taxable income for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013?

No.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013?

No.

This ruling applies for the following period:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You applied for a private ruling seeking the Commissioner's discretion based on special circumstances and nature of the activity for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013.

You are claiming that your business activity would have passed the income test except for special circumstances outside your control, in your case a persistent drought for the region. The income test you are claiming under does not form a part of the four tests under Division 35 of the ITAA 1997, which are the assessable income test; the profits test; the real property test; and the other assets test.

You are also claiming that in your industry, the acceptable number of years before an activity becomes commercially viable is three years; you have not provided evidence from an independent source to support this claim. You expect your business activity to satisfy any of the four tests as follows:

· Assessable income test 2010

· Profits test 2016

· Real Property Test 2010

· Other Assets Test 2010

You expect your business activity will make a tax profit in the 2014 income year.

You are carrying on a primary production business activity which commenced some time ago.

You reside over 500km away from where you own and operate two business properties. You travel to the region on a regular basis although you are also employed and carrying on another business.

The first property is a total of XXX hectares and is used for a primary production business activity.

The second property spans YYY hectares and is used for a similar primary production business activity.

You and your spouse operate the business, employing subcontractors throughout the year with the general maintenance. Your intention is to fully commercialise this enterprise as farming conditions improve.

Commissioner's Discretion

You state the ongoing drought in the region has severely affected your ability to make a profit.

You provided a yearly rainfall summary for the region based on figures from the Bureau of Meteorology. The 2006 year indicated the highest deviation from average yearly rainfall, when the drought was at its worst.

You state the drought significantly impacted on your farming business resulting in poor stock levels, as well as increasing costs.

You also claim you suffered from additional circumstances such as fire and theft of stock, although you have not provided additional information with respect to these incidents, such as when they occurred, police reports and insurance claims.

An independent qualified industry expert assessed both properties to determine their business capabilities and provided a report of income and expenditure for the 2009-10 income year.

Your tax agent then amended the report, adjusting the revenue figures in the 2009-10 qualified expert report to 85% of the amounts as you claim this would better reflect normal business conditions. It has not been established whether the tax agent is a qualified industry assessor in making this judgement. Further, your tax agent states the reduced gross margin is further reduced by additional expenses, which is the estimated net profit you expect to achieve within two to three years of normal conditions.

You provided a copy of a Media Release from the Minister for Primary Industries, Emergency Services and Rural Affairs dated in the recent year, stating less than 8% of NSW in drought - best figures in nine years. Areas which moved out of drought included your region.

The ATO records show that your business satisfied the assessable income test for the past nine years where the income from the business activity was at least $20,000 for each income year.

In addition to your employment income in your profession, you also carried on a non primary production business activity in your profession; where you derived a combined income in excess of $250,000 for the year ended 30 June 2009. Based on the income trend, it is expected you will not meet the income requirement for the year ended 30 June 2010 as your net business income from non primary production may exceed $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1

Income Tax Assessment Act 1997 Section 35-55(1)

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

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

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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.

Why we have made this decision

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other 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.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non commercial loss purposes is above $250,000.

Paragraph 35-55(1)(a) of the ITAA 1997 states that in order to exercise the discretion, the Commissioner must be satisfied that the business activity was or will be affected by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster.

Paragraph 35-55(1)(c) of the ITAA 1997 states that In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. However, this paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not 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 the need to build a client base.

Application to your circumstances

You state that ordinarily you would have satisfied the income test except for special circumstances outside your control; in your case it was a persistent drought which heightened during the 2006 year. The income test does not form part of the four tests mentioned in Division 35 of the ITAA 1997, therefore your application for the Commissioner's discretion under special circumstances is invalid. In addition, the 2009-10 Business Plan prepared by an independent qualified industry expert reported that your business activity would satisfy both the assessable income test and the profits test irrespective of the drought conditions. This is supported by ATO records showing your business satisfied the assessable income test for the past nine years.

Therefore the Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(a) of the ITAA 1997 for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013.

It is accepted that it is in the nature of your business activity that there will be a lead time before a profit can be expected or one of the tests passed. Your business commenced during the particular income year some time ago, hence your unsubstantiated claim for a three year lead time for your industry has already lapsed. Even with the main drought in 2006, you had over three years to recover.

ATO records clearly show that irrespective of the drought, your business activity satisfied the assessable income test which indicates your business activity is well established. Furthermore, information provided by an expert of the industry clearly demonstrates your business activity currently satisfies one of the tests and is expected to produce a profit in the 2010 year. You have also indicated on your application that you expect your business activity to satisfy three of the four tests in the 2010 income year.

Therefore the Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997 for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013.

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