Edited version of private ruling

Authorisation Number: 1011818498195

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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 primary production activity in your calculation of taxable income for the 2009-10 financial year?

Answer: Yes.

This ruling applies for the following period/s

Year ended 30 June 2010

Note:

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the financial year in question. That decision can only be made in issuing you your assessment, following lodgment of your income tax return for this financial year, being the 2009-10 financial year. You can lodge this return on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

The scheme commenced on

01 July 1956

Relevant facts and circumstances

Your adjusted taxable income for non-commercial loss purposes is more than $250,000 in the 2009-10 financial year.

You carry on a beef cattle farming operation over a collective area of approximately 3,000 acres.

You began beef farming activities over 50 years ago.

Your business activity is breeding and selling beef cattle to the local Australian market.

After several profitable years of farming, you reinvested and acquired some adjacent farming land, to increase the scale of your operations.

You have employees to assist you with the operation of the property.

You state that, due to the drought from 2002-03 to 2009-10, profitability of the industry has fallen significantly.

You have provided independent evidence that your region was drought-affected in the 2002-03 financial year and from the 2006-07 to 2009-10 financial years.

You have provided a business plan dated 20 December 2010 which includes forecast income and expenditure indicating that you expect to return to profit by the 2010-11 financial year.

The information you provided states that the effects of the drought include destocking of herds, increased fodder, contractor and fertiliser costs and lower sales than would be expected if there had been periods of higher rainfall.

You state that the 2009-10 financial year had an abnormal result due to higher than normal fodder costs and significant fertiliser and spreading costs to assist with the rejuvenation of the paddocks. Also sales revenue was down sharply due to a run-down in stock in prior years in an attempt to reduce fodder costs during the drought.

You have provided calculations taking into account the effects of the drought that show that your business activity would have made a profit in the 2009-10 financial year but for the drought.

You have provided a 'Sales analysis and forecast' spreadsheet, providing the cattle sales data, including the number of cattle sold and the average price per head.

You have provided livestock trading figures for the 2008-09, 2009-10 financial years and the 2010-11 financial year to date.

Reasons for decision

Summary

The Commissioner has accepted that your activity would have made a profit in the 2009-10 financial year if it were not for special circumstances. Consequently, the Commissioner will exercise his discretion in that year.

Detailed reasoning

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 - section 35-10(2E) - and you pass one of the four tests - section 35-30, 35-35, 35-40, 35-45

· the exceptions contained in section 35-10 of the ITAA 1997 apply; or

· the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

In your situation, you do not satisfy the income requirement (that is, your taxable income, excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions in section 35-10. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion contained in paragraph 35-55(1)(a) 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; and

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

It is accepted in your case that the drought constitutes special circumstances outside your control. 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.

You state that your cattle farm was affected by drought from the 2002-03 to 2009-10 financial years with the effects including destocking of herds and increased costs of fodder, fertiliser and contractor expenses.

You also state that the unfavourable conditions resulted in lower sales than would be expected if there had been periods with higher rainfall and that the drought has had a substantial impact on the profitability of beef herds across your entire region.

As a consequence your assessable income from the cattle farming activity for the 2009-10 financial year was small compared to your cattle sales in previous years and the cattle sales expected in future years.

You have provided calculations taking into account your estimated lost income and excluding the additional costs estimated for fodder, fertiliser and contractor expenses, that show that you would have made a profit in the 2009-10 financial year, had the drought not occurred.

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 financial year on the basis that it is reasonable to conclude that a profit would have been made in that year, had your activity not been affected by drought.

This means that the loss from your activity can be taken into account in calculating your taxable income for the 2009-10 financial year.

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