Edited version of private ruling

Authorisation Number: 1011745798008

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Non Commercial Losses

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) (special circumstances) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include a share of losses from the partnership activity in the calculation of your taxable income for the relevant financial year?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You and your spouse operated a primary production business.

You commenced the farming business decades ago.

Due to the severe drought and its effect of reduced water allocations for a number of years there were serious repercussions on the business.

As a result of ceasing operations the primary production income of the partnership fell under $20,000 in the relevant financial year.

You were unable to meet the assessable income test in the relevant year because the business activity ceased.

You earn over $40,000 from other sources.

Your income for non-commercial loss purposes does not exceed $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10

Income Tax Assessment Act 1997 Subsection 35-35

Income Tax Assessment Act 1997 Subsection 35-55

Reasons for decision

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· you satisfy subsection (2E) (income requirement) and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met;

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies; or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one on the tests is passed (and subsection (2E) is met), the discretion is exercised, or the exception applies.

Tests

In broad terms, the tests require:

(a) at least $20,000 of assessable income in that year form the business activity (section 35-30 of the ITAA 1997)

(b) the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

(c) at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or

(d) at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

In addition to the above tests an income requirement must be met (subsection (2E)) for the relevant year. You will satisfy that test for an income year if the sum of the following is less than $250,000:

(a) your taxable income for that year;

(b) your reportable fringe benefits total for that year;

(c) your reportable superannuation contributions for that year

(d) your total net investment losses for that year.

For the purpose of paragraph (a), when working out your taxable income, disregard any excess mentioned in subsection (2) for any business activity for that year that you could otherwise deduct under this Act for that year.

Are you carrying on a business?

Your activity will only be subject to these provisions if it is carried on as a business. You stated in your private ruling application that your activity was carried on as a business. This ruling is made on the basis of accepting this claim.

The application of subsection 35-55(1)(a) of the ITAA 1997 (Commissioner's Discretion) to this arrangement.

Subsection 35-55(1)(a) of the ITAA 1997 sets out the Commissioner's discretion as follows:

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster.

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

In application to your case, you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the relevant financial year.

The region has been experiencing a severe drought for many years.

The drought and the low irrigation allocations prevented the assessable income test being passed in the relevant year.

Reduced water allocations had serious repercussions on the profitability of the business.

If it were not for the special circumstances you would have passed the assessable income test under Division 35 of the ITAA 1997.

The Commissioner will exercise his discretion, and consequently you are not required to defer your losses in the relevant financial year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).