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Edited version of private ruling

Authorisation Number: 1011724115307

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 business activity in your calculation of taxable income for the years ended 30 June 2010 and 2011?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2007

Relevant facts

A farm was purchased to breed fat lambs for the fresh meat market, with some wool being sold to provide secondary income.

The property carrying capacity was assessed at approximately 150-180 breeding ewes with the potential to turn off 120 - 130% lambs to be sold at local saleyards.

In early 2008, less than 200 ewes and a small number of rams were purchased locally.

Current values for finished fat lambs are in the range of $90 - $140 based on stock sales.

The assessable income test was met in the 2008-09 financial year.

The drought had a significant impact on the business. Breeding stock had to be sold, as the property could only support a reduced stock level. This gave fewer lambs available for sale and prices were not as high as expected, due to stock age and condition at time of sale.

With improvements to the property and recent "reasonable" rainfall breeding stock numbers will be increased in both of the 2010-11 and 2011-12 financial years.

Late in the 2008-09 year, the expected sale price eased and the reduced availability of pasture, due to the drought, forced the sale of some breeding stock. As a consequence, the number of fat lambs available for sale in the 2009-10 year was greatly reduced. Also, the condition and age of stock were responsible for lower than expected prices.

Over fifty ewes were sold in the period to June 2009. The sale of these ewes was due to the lack of pasture.

The intention is to bring the breeding stock back to capacity during winter/spring 2011, with further purchases of breeding stock in the second half of the 2011 calendar year. The drought was said to be broken in February 2010. You advise that the breaking of the drought does not mean that the pastures are returned to sufficient condition, to support capacity stock. Your property was badly affected by drought and it was late in the 2010 calendar year, before your pastures began to show signs of sub-soil moisture and to return to normal. To endeavour to run at capacity in that time would have been impossible. As a further indication of the state of the pastures after the drought, you were advised that watercourses in the district did not begin to flow until late in 2010.

You confirm that your other income for non-commercial losses purposes in the 2010 income year is less than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(4)

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

Reasons for decision

Division 35 of the ITAA 1997 applies to prevent losses from a non-commercial business activity being offset against other assessable income in the year in which the loss is incurred.

For the 2009-10 and subsequent years where a taxpayer's adjusted taxable income is less than $250,000 losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1)(a) of the ITAA 1997 that it would be unreasonable to defer the loss.

Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise the first arm of this discretion where certain special circumstances apply. Special circumstances in this context are those outside the control of the business operator, including those such as drought, flood, bushfire or some other natural disaster, that have materially affected that activity.

It is intended that the Commissioner only exercise this arm of the discretion if one of the tests would have been satisfied but for the special circumstances.

The Commissioner accepts that your business activity was affected by circumstances that were unusual and outside your control, namely drought conditions, and that in the absence of those circumstances it was probable that you would have passed the assessable income test, for the income years in question.

Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 has been granted for the 2009-10 and 2010-11 income years.

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