Edited version of private ruling

Authorisation Number: 1011735847427

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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 relevant financial years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2005

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the certain relevant documents.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as you earned more than $250,000 in the relevant financial year.

You started a primary production business but changed later to a cattle breeding operation. The property is large divided into three separate holdings and titles (not joined) with cattle yards and a crush on each block. A breeding herd was established including stud bulls.

Your properties were hit by the worst prolonged drought in recent history and the relevant period was drought declared. The business experienced the highest death rate since its inception for this period. The drought forced farmers to destock hence forcing prices down due to a glut of beef on the market.

Climate conditions started to improve with good rain promoting good feed on the ground. The restocking commenced in earnest. The cycle now recommences joining cows with bulls. Then weather permitting, the relevant months should see a profit shown for the business.

Your property has a carrying capacity according to the Livestock Health and Pest Authority (LHPA) previously titled Rural Land Protection of 995 DSE (Dry Sheep Equivalent). This means a 2 year old sheep weighing 45kg not with lamb and maintaining weight the current rule is 7.75 DSE per hectare. The conversion to cattle is a ratio of I cow to 10 sheep. Therefore your property has the cattle carrying capacity of 98 cattle.

Your business plan calculates monthly ongoing with a monthly turnover.

Reasons for decision

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.

Except for the initial year your income has increased and your expenses have decreased except for the relevant year which showed a slight increase. Regardless of the increase in income and a decrease in expenses, each year has still produced a loss, albeit decreasing after the relevant financial year.

The estimated figures for the financial years use income from the sale of cattle. The maximum carrying capacity for stock on your property as calculated by LHPA is 98.

Your estimated expenses in the relevant financial year are the lowest since the commencement of your cattle breeding activity and your estimated income is the highest since the commencement. These amounts also show that the loss in the financial year will be the least of all years since the commencement of the farming activity. However the figures still show your expenses exceed your income for all years. Your farm reached its maximum carrying capacity recently therefore, the income you have estimated is the best outcome achievable with the least costs incurred since the commencement of your farming activity.

Your business plan shows monthly ongoing cost and income which leaves a shortfall.

Your profit and loss projection for future financial year shows income in excess of expenses. Excluded expenses have been added back to show a total in excess of corresponding income. Therefore your business plan and your profit loss projection do not show that a profit will be attainable in the relevant financial years.

The Commissioner must be satisfied that, but for the drought, you would have produced a profit in the relevant financial year. The drought lasted through to before this. You expected to achieve maximum production capability of your property in the relevant financial year and for this to continue through to the relevant future year. The estimated income and expenses show that a profit will not be made in the relevant future financial year which is two years past the year in which a profit was expected to have been made, but for the drought.

A profit cannot be shown to be expected three years after the end of the drought and three years at maximum production of your farming activity. Therefore the Commissioner will not exercise the discretion as the drought is not seen as the reason that your farming activity will not make a profit in the relevant financial years.

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