Edited version of private ruling

Authorisation Number: 1011647036696

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 activity in your calculation of taxable income for the years ended 30 June 2010 to 30 June 2013 inclusive?

Answer Yes

This ruling applies for the following periods:

Income year 2009-10

Income year 2010-2011

Income year 20121-12

Income year 2012-13

The scheme commences on:

1 July 2009 .

Relevant facts and circumstances

You are carrying on a business activity.

In your private ruling application, you advised the following facts:

The rulees between them have approximately X hectares planted. But for the drought, it was projected that the crops would have been harvested during a particular income year. As a result of the drought, the harvest has been for a few years.

Each of the rulee's income for non commercial loss purposes for the relevant income year were below $250,000.

You also provided the following information:

Each of the rulees is an Australian resident individual taxpayer

Each of the rulees is carrying on a business activity. The business activity commenced a number of years ago. The business takes a number of years to yield a good return.

When the business commenced, the rulees expected that the crops would be ready for harvest during the current income year.

When the business commenced, the rulees expected that the business activity would result in the tax losses for a number of income years.

Once the trees are harvested and sold, the rulees do not expect to continue to carry on the business activities.

As a result of the reduced rainfall, the crops grew less quickly than expected.

The crops experienced reduced rainfall over the period from their time of planting until the current time. Because the reduced rainfall affected the growth of the trees, it constitutes "drought. For this reason, the trees will not be ready for harvesting until later than originally expected.

The rulees now expect that the crops will be ready for harvesting during a later income year.

Because of the delay in harvesting which was caused by drought, the rulees now expect that they will make a tax loss. If the drought had not occurred, the rulees previously expected that they would instead derive net taxable income and pass the assessable income test.

If the crops are harvested and sold in a later income year as now expected, the rulees will receive X amount as income

Because of the delay in harvesting due to drought, the rulees now expect that they will make a tax loss for the relevant income years.

You are seeking Commissioner's discretion under special circumstances for the relevant years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-55.

Income Tax Assessment Act 1997 Paragraph 35-30(b).

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

Income Tax Assessment Act 1997 Section 6-5.

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 decisions

Commissioner's discretion for the 2009-10 to 2012-13 income years

Division 35 of the ITAA 1997 is an integrity measure to prevent losses from non-commercial activities that are carried on as businesses by individuals being offset against other assessable income in the income year the loss is incurred.

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

The discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised where:

the business activity was or will be affected in one or more income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; and

the business activity would have satisfied one of the tests if it were not for the special circumstances.

Paragraph 14 of Taxation Ruling (TR) 2007/6 states that the special circumstances must be outside the control of the operators of the business activity. Such circumstances are specifically defined to include drought, flood, bushfire or some other natural disaster. In the case of other events, failure for no adequate reason to adopt practices commonly used in an industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator.

Paragraph 66 of TR 2007/6 addresses certain situations outside the control of the taxpayer that relate to the failure of the business activity to satisfy a test. If these situations either directly cause the business activity to fail a test, or extend the time within which the business activity could objectively be expected to pass a test, it would be unreasonable for the loss deferral rule to apply.

Based on the information provided, your business activity has been carried on in a commercial scale. The scale of operation of your activity suggests that your activity had a prospect of profit making. The facts also indicate that the activity has been operated in a business like manner. Accordingly your activity is accepted to have been carried on as a business. Therefore non-commercial loss provisions in Division 35 of the ITAA 1997 are applicable for this period.

The information you have provided demonstrates that there is a reasonable expectation that your activity would have satisfied the assessable income test in the 2009-10 income year, had it not been for drought. This expectation is accepted as being reasonable based on the past performance of your business activity and your income projections.

The industry expert report indicates the crops would give best returns by delaying harvest until a later date. The delayed harvest and lower yields are a reflection of the lower rainfall experienced over the relevant period.

The lower rainfall has significantly affected your business operations. As a result of the drought, you are required to delay the harvest until a later date. It is accepted that were it was not affected by drought, each rulee would have generated sufficient income to pass the assessable income test for the relevant income years .

Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 has been granted for the relevant income years.

Accordingly, you will be able to offset any of your business losses for the 2009-10, 2010-11, 2011-12 and 2012-13 income years year against your other assessable income.

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).