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Edited version of private ruling

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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 fruit growing activity in your calculation of taxable income for the 2009-10 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You purchased a plantation in 19XX.

You are still developing the plantation and have also purchased more property.

During the certain natural disaster in 200X, of the 240 tonnes of fruit you would normally have picked, you were only able to pick 30 tonnes as the rest were damaged. You estimate that the value of the loss of fruit directly attributable to the natural disaster was $240,000 to $300,000.

You state that even if you had been able to sell all of the fruit, your expenses would still have been more than the income derived.

You are not likely to make a tax profit for some years yet.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Subsection 35-10(2E).

Income Tax Assessment Act 1997 - Subsection 35-55

Reasons for decision

For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'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, including drought, flood, bushfire or some other natural disaster.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

In your circumstances, the loss of fruit directly attributable to the natural disaster was $240,000 to $300,000. However, even if the event had not caused the loss of your fruit you would still not have made a profit and would not have done so for a number of years into the future. While we accept that the natural disaster had a significant effect on the income you received in the 2009-10 financial year, the reason your expenses are more than the income you receive from the activity is because of the costs involved in the development of the plantation.

It follows the Commissioner cannot exercise the discretion for special circumstances as it was not these special circumstances that prevented your activity from making a tax profit. Therefore, you must defer the loss to a future year where the loss can be claimed against a profit from your business activity.

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