Edited version of private ruling

Authorisation Number: 1011711329477

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Ruling

Subject: non-commercial loss Commissioner's discretion

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 relevant income years?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 December 2007

Relevant facts

You earned more than $250,000 in the relevant income year.

Previously you and your partner purchased a property with finance. In the bushfires all stock were killed, all fences, sheds and the shearing facility were destroyed. Nothing was insured.

You are currently raising capital from other investments in order to pay down the debt, which will reduce the cash flow burden current debt levels have on the business.

You are re-stocking with the intention to build the flock. Information obtained by the ATO from your industry shows a return after 20 months (lead time) is expected from this type of farming.

Your intention was to conduct this farming full time but the fire has delayed this by several years.

You expected that your farming activity would show a profit recently. The bushfires put the profitability of the activity back several years.

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 in the relevant years 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 is affected in the relevant year by the special circumstances.

It is considered that the bush fire 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.

Your farming activity, commenced some time ago was destroyed by the bushfires and as a result you had to re-stock your flock and replace your infrastructure to recommence your business. As a consequence your assessable income for the relevant income year was vastly reduced in comparison to the the previous income year.

Due to the bushfire your normal running expenses in the income year increased by $116,888 in comparison to previously.

It is reasonable to expect that had the bushfire not killed your flock in the relevant income year your sales in the later income year would have been at least equal to or greater than the sales of the relevant income year.

The difference between what may have been the sales figure for recent and the increase in normal running costs may not have existed had the bushfire not destroyed your flock and therefore, had the bushfire not occurred, it is reasonable to conclude that you may have produced a profit in the recent income year. The Commissioner is satisfied that your farming activity would have made a profit in the relevant year had it not been affected by the bushfire.

Paragraph 51 of Taxation Ruling TR 2007/6 discusses where the lead time of a business activity may be extended due to the occurrence of special circumstances and therefore allow the Commissioner to exercise the discretion under paragraph 35-55(1)(a). Example 11 at paragraph 154 of TR 2007/6 discusses lead time of a red fruit business being extended due to special circumstances of a bush fire occurring during the original lead time period. The discretion of paragraph 35-55(1)(a) was applied in this example.

In your case your industry expects a return of 20 months therefore the ATO considers that the lead time for the relevant farming is two years. As the bushfire occurred within the lead time of your farming activity the Commissioner will extend the discretion of paragraph 35-55(1)(a) of the ITAA to include the relevant income year.

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