Edited version of private ruling

Authorisation Number: 1011714589026

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Ruling

Subject: Non commercial losses

Question

Will the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your agricultural activity in the calculation of your taxable income for the years?

Answer

No.

This ruling applies for the following periods

1 July 2009 to 30 June 2010
1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are a member of a partnership which operates an agricultural activity on a property which was established in previous income years.

The property is maintained by a manager and his staff.

The land on which the activity is situated is owned by associated entities of the partners.

The first year of production was a previous income year. You obtained forward contracts for the sale of you product up until a later harvest.

Drought has affected the harvest. The property's area was drought affected in the relevant period when the district was assessed as 'satisfactory' after rains.

Due to a market oversupply of your product, a large portion of the harvest was sold at heavily discounted prices. The general oversupply of your product has limited the ability to achieve contracts for the sale of the product.

During the income year, the property experienced a severe frost which had the effect of reducing the crop by up to 40%.

After the frost, the main pumps supporting the irrigation system failed and were unable to be repaired prior to harvest. This caused a severe lack of water to the product resulting in severe shrinkage and a reduction in quality of the product. Repairs to the pumps took 11 months.

You have contracts for some of your product for the relevant harvests.

Total harvest for the income year was approximately 15% of the capacity of the property in a season with favourable weather.

You provided details of the activity's actual income and expenditure for the relevant income years. You also provided projected income and expenditure for the income year taking into account the effects of the drought, frost, oversupply of the product and failure of the pumps. A profit was made in a previous income year. In each other income year, you incurred or expect to incur a loss.

You also provided details of the activity's expected income and expenditure for the relevant income years based your expectations if the drought, frost, oversupply of the product and failure of the pumps had not occurred. In both years, you were expecting a loss higher than the loss incurred after taking into account the events which occurred.

This ruling has been prepared on the basis that your agricultural activity is being conducted as a business.

Reasons for decision

Summary

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the relevant years as whilst drought and frost are special circumstances in the sense in which this term is used in Division 35 of the ITAA 1997 you had projected a loss from your agricultural activity prior to the occurrence of the drought and frost. The special circumstances did not prevent you from making a profit from this activity.

Detailed reasoning

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as either a sole trader or partner in a partnership and made a loss from that business activity.

Section 35-10 of the ITAA 1997 was amended to include an income requirement that must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. The income requirement applies in relation to the year ended 30 June 2010 and later years.

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

The Commissioner may exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 where special circumstances have prevented a taxpayer from making a tax profit, regardless of whether the income requirement is met or not.

You have not satisfied the income requirement as your relevant income exceeded $250,000 in the income year and is expected to exceed $250,000 in a future income year. Therefore the loss form your activity will not be taken into account 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.

Your agricultural activity was affected by drought, frost and the irrigation system pumps failing. As a result of these factors the assessable income from your activity was reduced.

Prior to these events occurring, you expected to make an overall loss from your activity in the 2009-10 income year. Your actual loss was less than the expected loss.

For the 2010-11 income year you had projected an overall loss prior to the special circumstances. You have revised this loss to a lower amount.

The information provided from official sources confirms the location of your agricultural activity was drought and frost affected. Unfavourable weather conditions leading to both the drought and frost was outside of your control and therefore they are accepted as special circumstances as this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

The failure of the irrigation system pumps is considered to be a normal risk of any business operating an irrigation system to supply water to their crops. Whilst the failure is not a special circumstance, it coincided with the area being declared as drought affected and the dam running dry and is not considered to have impacted greatly on the crop production. The main impacts were from the frost and drought.

Your activity made a profit in a previous income year and a loss in a later income year. You were expecting to make a loss in the 2009-10 and 2010-11 income years. Your revised loss for the income year, after taking special circumstances into account, is less than your original projected loss.

Whilst the Commissioner accepts the drought and frost impacted on your assessable income for the income year he will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997. This is because you were expecting to make a loss in this income year and the special circumstances have not prevented you from making a profit.

The Commissioner has not exercised his discretion in relation to the income year as the impact of the special circumstances is not considered to be significant on your assessable income. Your expected overall business loss has been reduced.

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