Edited version of private ruling

Authorisation Number: 1011808921692

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Ruling

Subject: Non-Commercial Losses Special Circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include a share of losses from your farming business in the calculation of your taxable income for the 2009-10, 2010-11, 2011-12, 2012-13 & 2013-14 financial years?

Answer: No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts

A company controlled by you began a farming business on a leased property in 2003. The company continued to operate the business under your control until 30 June 2008.

You continued to operate the business from 1 July 2008 as a sole trader.

A neighbouring property was acquired by the company and leased to you in 2008.

When the first property was purchased it was extremely run down and significant work was required to rejuvenate the land and improve its production.

This work took place over a number of years.

When the second property was purchased it also required significant capital to be spent on fencing and water supplies plus a fertilising program was commenced.

You engage a contract farm manager to operate the farm on a day-to-day basis.

Rainfall data from the Bureau of Meteorology website shows that the rainfall for your area has been average, or above average, for 4 of the last 7 years.

Your income for non-commercial loss purposes exceeded $250,000 for the 2009-10 financial year and you expect that your income will also exceed this amount in the 2010-11 to 2013-14 financial years.

Relevant legislative provisions

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

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

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

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:

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply, or

· the Commissioner exercises his discretion.

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:

· your business activity would have made a tax profit

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

Where a business activity is carried on by an individual who does not satisfy the income requirement and this activity would have made a loss even if it had not been affected by special circumstances, it is unlikely that it would be considered unreasonable for the loss deferral rules to apply and therefore the Commissioner is unlikely to exercise the discretion.

For the 7 years you, or the company you controlled, ran the business, the rainfall has been either average, or above average, for 4 of those 7 years. '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.

The Commissioner does not believe that the rainfall data supplied made the circumstances sufficiently different from the normal conditions and believes that the business was not materially affected sufficiently to warrant granting the discretion.

The business has not been able to make a profit since you, or the company you controlled, purchased the properties. It has also not been demonstrated that the business would have made a taxable profit but for the drought.

It is not accepted that:

· special circumstances existed; and

· but for the circumstances you would have made a tax profit.

Consequently the Commissioner will not exercise his discretion in the 2009-10, 2010-11, 2011-12, 2012-13 & 2013-14 financial years.

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