Edited version of private ruling

Authorisation Number: 1011795854080

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Ruling

Subject: Non-commercial losses - 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 beef cattle farming activity in your calculation of taxable income for the year ended 30 June 2010?

Answer: No

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 1993

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling which we received on a specific date; and

· further information which we received on a specific date and a specific (later) date.

You commenced a business of farming in partnership with a company in 199X. You expanded your original business to a particular breed of cattle from approximately July 200Y.

You carry on the activity on a property that you own and another property that you lease.

Your major activity is the production of stock for live export or slaughter.

The partnership, started producing full bloods of a particular breed in 2002. The production of full blood stock has largely been by embedding embryos in a second breed of stock which, while expensive, was the only way in which the business could rapidly increase numbers to a commercial herd.

You have about 600 adult animals on the property, comprising male and female stockeers.

Your income for non-commercial loss purposes is more than $250,000.

You are seeking the Commissioner's discretion for special circumstances due to past drought conditions, which affected your profitability in 2010.

The activity has been in a drought affected area for about the last ten years, until this year (2010-11) when it appears that the drought has broken.

The cost of coping with the drought through feed purchases and developing water for stock has been an unanticipated (at the start) and expensive exercise.

You state that the prices received for livestock going into feedlots has also reduced the gross revenue of the business.

You have provided information that in 2011 as a result of the drought breaking the average sale price for weaner stock increased by as much as 25%.

After the seasonal conditions you spent a significant amount on fertilizer and seed to return pasture to normal conditions.

The business has also incurred the costs of repairing fencing and re-establishing watering points for some under-developed land that was purchased three years ago.

The partnership has bred 240 full blood females from just 7 originally.

With the breaking of the drought, you anticipate that the business could be profitable as early as this year (2010-11), assuming the rise in the Australian dollar does not significantly lessen the offshore demand for your breed of stock.

You have provided the figures for historical and projected profitability before interest, depreciation, tax break and drought fodder expenses, showing a profit in 2011.

Rainfall figures in your region provide an indication that your property has been drought-affected in all but four years during the 15 years to 30 June 2009.

You have claimed losses in all years since commencement of the business with total losses exceeding $2 million.

You expect a profit in the 2010-11 financial year and you have provided numbers of the stock sold, or expected to be sold, comparative to the previous two years.

You state that you are still in the start up stage and the required timeframe for the enterprise to be cash flow positive, without drought or floods, is ten years.

You have provided a newspaper clipping of the floods that have recently affected your region and signalled the easing of drought conditions.

Reasons for decision

Summary

The special circumstances discretion can only be exercised for the 2009-10 financial year if the Commissioner is satisfied that your cattle breeding activity would have made a profit in that year if it were not for the drought.

Your farming activity has made a loss in all of the past 16 financial years. Bureau of Meteorology annual rainfall figures for the same period show that the area where your property is situated received above average rainfall in four of those years. That is, your farming activity has made losses even in periods of above average rainfall.

Therefore, the Commissioner cannot be satisfied that your activity would have made a profit if it were not for the drought. Consequently, the Commissioner is unable to exercise the discretion in relation to your activity.

Detailed reasoning

From the 2009-10 income year, section 35-10 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise a discretion to allow the inclusion of the losses in certain circumstances.

The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not meet the income requirement. Therefore, your losses from your cattle farming activity must be deferred unless a discretion is exercised.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred.

For those individuals who do not meet the $250,000 income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where, but for the special circumstances, the business activity would have made a profit in that year.

Special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.

It is accepted in your case that the drought constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances.

Your farming activity has not made a profit in any of the past 16 financial years. However, data from the Bureau of Meteorology show that your property received above average rainfall in several of those years. That is, your activity has made losses even in periods of above average rainfall.

Therefore, the Commissioner cannot be satisfied that if it were not for the drought, your activity would clearly have made a profit in the 2009-10 financial year. Consequently, the discretion will not be exercised.

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