Edited version of private ruling

Authorisation Number: 1011597088166

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Ruling

Subject: Non Commercial Losses

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) (special circumstances) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include a share of losses from the partnership mixed farming activity in the calculation of your taxable income for the 2009-10 income year?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

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 operate a mixed farming operation.

You commenced the farming business more than five years ago.

The property includes water allocations.

You buy in water as necessary and when it is available.

The farm includes livestock and growing lucerne as a fodder source for stock. Your intention is to sell any surplus lucerne crop.

You and your partner are both employed on the property.

The region has been experiencing a severe drought for many years. Your property has been declared under the exceptional circumstances program for several years.

You were able to meet the assessable income test in previous income years.

You were unable to meet the assessable income test in the 2009-10.

Due to the continual impact of the drought, the irrigation allocations have been very low and you have not been able to maintain the farm's historical production.

You purchased some livestock with the view to rebuilding your stocks. You were not able to sell the progeny to produce income in the 2009-10 year.

You didn't pass a non commercial losses test in the 2009-10 income year.

Your irrigation allocation was also too low to generate income for the season.

You earn over $40,000 from other sources.

Your income does not exceed $250,000.

Summary

The Commissioner has considered the circumstances in which you were not able to pass one of the tests for the 2009-10 income year. The Commissioner will exercise his discretion, and consequently you are not required to defer your losses.

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:

· you satisfy subsection (2E) (income requirement) and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met

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

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

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

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 on the tests is passed (and subsection (2E) is met), the discretion is exercised, or the exception applies.

Tests

In broad terms, the tests require:

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

· 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)

· 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

· 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 addition to the above tests an income requirement must be met (subsection (2E)) for the 2009 -10 year. You will satisfy that test for an income year if the sum of the following is less than $250,000:

· your taxable income for that year

· your reportable fringe benefits total for that year

· your reportable superannuation contributions for that year

· your total net investment losses for that year.

For the purpose of paragraph (a), when working out your taxable income, disregard any excess mentioned in subsection (2) for any business activity for that year that you could otherwise deduct under this Act for that year.

Are you carrying on a business?

Your activity will only be subject to these provisions if it is carried on as a business. You stated in your private ruling application that your activity was carried on as a business. This ruling is made on the basis of accepting this claim.

The application of subsection 35-55(1)(a) of the ITAA 1997 (Commissioner's Discretion) to this arrangement.

Subsection 35-55(1)(a) of the ITAA 1997 sets out 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 if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster.

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.

In application to your case, you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 2009-10 financial year.

The region has been experiencing a severe drought for many years. Your property has been formally drought declared under the exceptional circumstances program for several years.

You were able to meet the assessable income test in the past years. You completely de-stocked the property due to the drought and the low irrigation allocations you received. You purchased livestock but you were not able to produce any progeny for sale in the 2009-2010 year.

The drought and the low irrigation allocations prevented the assessable income test being passed in the 2009-2010 year.

If it were not for the special circumstances you would have passed the assessable income test under Division 35 of the ITAA 1997.

The Commissioner will exercise his discretion, and consequently you are not required to defer your losses in the 2009-10 income year.

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