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Ruling

Subject: Non-commercial losses Commissioner's discretion

Question 1

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 2010-11 year of income?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2010-11 year of income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on

1 July 2007

Relevant facts and circumstances

You operate a primary production activity on a property comprising approximately 1,300 hectares. You have a share farming agreement.

Your income for non-commercial loss purposes is more than $250,000.

The Commissioner exercised discretion for the 2009-10 year of income to allow the losses of that year to be deducted.

Part of your primary production area was affected by flood and the use of an unsuitable chemical which reduced the yield you had forecast.

You did not make a profit in the 2010-11 year of income due to the flood, the timing of receipt of an insurance claim and the settlement of a forward sales contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)
Income Tax Assessment Act 1997 subsection 35-10(2)
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(2E)

Reasons for decision

Paragraph 35-55(1)(a) of the ITAA 1997

You have not satisfied the income requirement as your relevant income has exceeded $250,000 and you do not meet the exceptions of subsection 35-10(4) of the ITAA 1997. Therefore the loss from your activity will not be taken into account in the 2010-11 year of income unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred.

For those individuals who do not meet the income requirement of subsection 35-10(2E) of the ITAA 1997 , the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year.

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 overall effect of the flood and the incorrect chemical application would constitute special circumstances. 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.

Without the flood and chemical application your primary production activity would have made a higher return however, you would have still made a loss had this higher return been included in your income for the year.

Therefore in terms of paragraph 35-55(1)(a) of the ITAA 1997, special circumstances outside of your control may have affected your business activity in the 2010-11 year of income. However, they have not affected your business to the extent that a profit would have been made had the flood and incorrect chemical application not occurred. There is no scope to allow the Commissioner's discretion under the special circumstances limb in section 35-55 of the ITAA 1997.

Paragraph 35-55(1)(c) of the ITAA 1997

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.

for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C).

You do not satisfy the income requirement as your income for non commercial loss purposes is above $250,000.

Paragraph 17 of Taxation Ruling TR 2007/6 deals with the exercise of the Commissioner's discretion under this subparagraph and the meaning of 'because of its nature'

For the failure to satisfy one of the four tests (subparagraph 35-55(1)(b)(i)) or produce a tax profit (subparagraph 35-55(1)(c)(i)) to be 'because of its nature', the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type (see Federal Commissioner of Taxation v. Eskandari).

Paragraph 78 of TR 2007/6 states;

The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity and would not result in the requirements of subparagraph 35-55(1)(b)(i) and (c)(i) being met. (Refer to Example 9 at paragraph 139 of this ruling.)

The example at paragraph 139 of TR 2007/6 explains the taxpayer was new to the region and industry in which he chose to commence his business. He had no clientele. His funding and his advertising were limited, he kept his part time employment and he worked at his business when he could. He chose where his business premises were located and also his opening and closing times.

You forward sold product delivered and paid for in July 2011 to gain an additional 13% increase in price. Forward selling to maximise your profit is considered to be a normal business practice and one where you have a choice to forward sell or accept spot prices for your produce. This choice is within your control, is not an inherent characteristic of your business and is therefore not considered to be the reason a profit was not made in the 2010-11 year of income.

The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

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