Edited version of private ruling

Authorisation Number: 1011813466833

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Ruling

Subject: Non-commercial losses and the Commissioner's discretion

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) or 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your fruit trees activity in the calculation of your 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 commenced business in the 1994-95 financial year growing mixed fruit and nut trees.

You planted trees as follows:

You have sold approximately $X00 worth of fruit since planting commenced. You have stated that your first crop was in the 2003-04 financial year.

Independent evidence indicates that the lead time for variety A is three years to produce a commercial crop and five to eight years until they reach maximum production. The period for producing a commercial crop of most fruit is less than eight years.

You donated approximately 50 to 60 kilograms of variety A to raise funds for a charity event.

Your whole fruit crop has been destroyed by birds and animals in a number of years.

Other variety A growers in your area use nets to protect against bird damage. However, the cost of installing nets is too expensive for you.

You are allowed to shoot the animals. However, you have not done this.

You have purchased a number of birds of prey and you put road kill on a pole to feed them as they can scare away some of the birds.

Your area has been drought affected for the past ten years.

You also suffer from blossom destruction because the drought has caused the fruit to flower at the time when there are strong winds.

You expect the business to make a tax profit in the 2012-13 financial year.

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

You do not satisfy any of the four tests set out in Division 35 of the ITAA 1997.

Your income from other sources not related to the fruit growing activity is more than $40,000.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 - paragraph 35-55(1)(b)

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 meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you satisfy the income requirement. However, you do not satisfy any of the four tests and the exceptions do not apply. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The Commissioner's discretion in paragraph 35-55(1)(b) may be exercised for the financial year where, because of its nature, the business activity has not satisfied, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 and there is an objective expectation, based on evidence from independent sources, that your business activity will either satisfy one of the tests or will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity does not satisfy one of the tests or is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

The commercially viable period for most varieties of fruit is less than eight years. This means that, in your circumstances, the commercially viable period has expired. However, the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised to extended the commercially viable period in circumstances where the activity has been 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. For those individuals who do not satisfy any of the four tests, special circumstances are generally those which have materially affected the business activity, causing the failure to satisfy any of the tests. Special circumstances can include things like droughts and floods (Taxation Ruling TR 2007/6).

You have stated that the property has been affected by drought which is considered to be a special circumstance. You have also stated that your fruit has been destroyed by birds and animals. Destruction by either the birds or the animals is not considered to be special circumstances as it was not beyond your control to prevent this damage. That is, you could have used nets against bird destruction as other farmers do and you could have destroyed the animals.

It is doubtful, even if not for the effects that the drought may have had, that you would have been able to satisfy the assessable income test as the destruction from birds and kangaroos may still have prevented income from being derived.

It is considered that the effects of the drought are not the sole reason why you have not been able to satisfy one of the tests within a period that is commercially viable. Additionally, as effective management of the birds and animals is not being undertaken, the loss is considered to be peculiar to your situation and it cannot be shown that the activity would have satisfied the assessable income test in the 2009-10 financial year. This is supported by the history of the activity where over the entire period since planting, you have declared less than $X00 assessable income.

The Commissioner will not exercise the discretion available in accordance with paragraphs 35-55(1)(a) or 35-55(1)(b) of the ITAA 1997 for the 2009-10 financial year. 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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