Edited version of private ruling

Authorisation Number: 1011816456820

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Ruling

Subject: non commercial losses - Commissioner's discretion

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2009-10 to 2011-13 income year?

Answer: Yes

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

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You operate a primary production enterprise which you commenced a number of years ago.

You have supplied independent evidence that maintains there is a significant lag between sowing of your crop and the receipt of income and that the commercially viable period for your industry is a number of years.

Your area experienced drought conditions. This set the time to profitability of your enterprise back a number of years.

Your income for non commercial loss purposes is in excess of $250,000 and you expect this will be the case in the 2010-11 to 2012-13 financial years as well.

Relevant legislative provisions

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

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

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

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

Reasons for decision

For the 2009-10 and later financial years section 35-1 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 discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2009-10 financial year and you expect this will be the case in the 2010-11 to 2012-13 financial years as well.

Special circumstances (first limb)

The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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 the income requirement, special circumstances are generally those which have materially affected the business activity, causing it to make a loss. Special circumstances can include things like droughts and floods (Taxation Ruling TR 2007/6).

Nature of the activity (second limb)

The Commissioner's discretion in paragraph 35-55(1)(c) may be exercised for the financial year where there is an objective expectation, based on evidence from independent sources, that your business activity 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 is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

Interaction between the limbs

As stated above, ordinarily the operation of the first limb is confined to those situations in which the business activity has been affected by special circumstances outside the control of the operators of that activity where, had these circumstances not existed; the activity would have made a tax profit.

However, the first limb may also apply to a business activity affected by such circumstances during a time when 'because of its nature' it is not able to produce a tax profit, but this time is still 'within [the] period that is commercially viable for the industry concerned'. In such a case, the enquiry is not whether the activity would have produced a tax profit had the special circumstances not existed (paragraphs 35 55(1)(b) and (c) already recognise that there are reasons outside the control of the operators of the activity why this would not have occurred, regardless of the existence of the special circumstances).

In such cases the appropriate enquiry will be whether or not the special circumstances have meant that there is no longer an objective expectation that within the period that is commercially viable for the industry concerned the activity will produce a tax profit.

Where the special circumstances are the sole reason why the activity can no longer objectively be expected to produce a tax profit within the period that is commercially viable for the industry concerned, but the activity is now expected to consistently produce a profit at some later time, the discretion may be exercised.

Having regard to your full circumstances, it is accepted that it is in the nature of the business activity combined with special circumstances outside your control that has prevented you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry.

Consequently the Commissioner will exercise his discretion in the 2009-10 to 2012-13 financial years.

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