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Edited version of private ruling
Authorisation Number: 1011677496300
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Ruling
Subject: Non-commercial losses
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 primary production activity in your calculation of taxable income for the income year?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 April 2007
Relevant facts
You have not satisfied the income requirement as your relevant income has exceeded $250,000.
Some time ago you purchased a property in partnership.
Further purchases of land took place.
The property is being run as a cereal grain and oil seed grain growing enterprise along with sheep grazing for prime lamb production.
It was planned that it would take approximately 3 years to achieve a profitable business unit, allowing for the first 3 years of production to pay down initial debt.
The area has had ongoing drought conditions.
During the relevant income year you achieved a large return for the relevant crop that would have provided an overall primary production profit but for a tax break deduction claim. You expected another large crop return in the income year and this expectation was on target until a 10 day heat-wave killed most of the crop resulting in the overall loss for the income year.
It is now anticipated the full profitability of the business will not be achieved until the end of a future financial year. This is allowing for the pay down of debt leading to decreased operating costs due to improved harvest and stocking rates.
The house block from the original properly is also being sold in the financial year to allow reduction of debt. This will have minimal impact on the productive acreage of the property and assist in moving the business unit to profitability.
Detailed reasoning
You have not satisfied the income requirement as your relevant income has exceeded $250,000. Therefore the loss from your activity will not be taken into account for the income year unless the Commissioner exercises 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 is affected in the relevant year by special circumstances.
Your farming activity would have made a tax profit in the relevant income year except for the application of the tax break deduction claim.
In the income year you were expecting a profit similar to that of your relevant income year based on the return of the relevant crop. However your relevant crop was affected by the drought and also an unusual 10 day heatwave . The drought and the heatwave resulted in the loss of most the crop for the income year. As a consequence your assessable income for the income year vastly reduced while you continued to incur overall expenses similar to that of the profitable relevant income year.
The information provided from the Department of Primary Industries of New South Wales confirms that the area of the location of your farm was drought affected. Unfavourable weather conditions of drought and the heat wave was outside your control and therefore it is accepted as special circumstances as this term is used in paragraph 35-55(1)(a) of the ITAA 1997.
A profit reliant on your relevant crop for the income year could have been expected except for special circumstances destroying most of the crop. Therefore the Commissioner is satisfied that your farming activity would have made a tax profit in the year had it not been affected by drought and heat wave.
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