Edited version of your private ruling

Authorisation Number: 1012588848306

Ruling

Subject: Non-commercial losses - Commissioner's discretion - special circumstances

Question

Will the Commissioner exercise his 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 the calculation of your taxable income for the 2009-10 and 2010-11 financial years?

Answer

Yes

This ruling applies for the following periods:

2009-10 financial year

2010-11 financial year

The scheme commences on:

1994-95 financial year

Relevant facts and circumstances

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

You have provided details of your primary production activity including its location. Your primary production activity has been affected adversely due to unfavourable circumstances.

You do not satisfy the 'income requirement' as your relevant income exceeds the $250,000 limit.

The circumstances were outside of your control and constitute a special circumstance.

Independent evidence supports:

· Your primary production activity could generate sufficient income and make a profit if not affected by the special circumstances.

· Your primary production activity would have been profitable in the 2009-10 and 2010-11 financial years were it not for the special circumstances.

· The assessable income of your primary production activity exceeded $20,000 in the 2009-10 and 2010-11 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 section 35-30

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

Reasons for decision

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for an income year if the business activity has been affected by special circumstances and the activity would have made a tax profit but for those circumstances.

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

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster, or

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

Pursuant to subsection 35-10(2) of the ITAA 1997:

If the amounts attributable to the business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess:

(a) were not incurred in that income year; and

(b) were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on.

Subsection 35-10(2E) of the ITAA 1997 states:

You satisfy this subsection for an income year if the sum of the following is less than $250,000:

(a) your taxable income for that year;

(b) your reportable fringe benefits total for that year;

(c) your reportable superannuation contributions for that year;

(d) your total net investment losses for that year.

For the purposes of paragraph (a), when working out your taxable income, disregard any excess mentioned in subsection (2) for any *business activity for that year that you could otherwise deduct under this Act for that year.

Paragraph 41D of Taxation Ruling 2007/6 states that:

For individuals who do not satisfy the income requirement [under subsection 35-10(2E) of the ITAA 1997], the factors that must be satisfied before deciding whether to exercise the special circumstances limb of the discretion for an income year are that:

· the business activity is affected by special circumstances such that it is unable to produce a tax profit; and

· the business activity either satisfies at least one of the tests or is affected by special circumstances such that it is unable to satisfy any of the tests; and

· the special circumstances affecting the business activity are outside the control of the operators of the business activity

Taxation Ruling TR 2007/6 provides the guidelines on how the discretion contained in subsection 35-55(1) of the ITAA 1997 may be exercised. According to paragraph 13A of the ruling, for taxpayers who do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Paragraph 13A of Taxation Ruling TR2007/6 further provides that for these taxpayers the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised where:

· but for the special circumstances, the 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 at least one of the four tests.

You have not satisfied the income requirement in the 2009-10 and 2010-11 financial years. Your primary production activity passed the assessable income test and thereby has satisfied one of the above conditions for those years. However, your primary production activity did not make a profit in those years. Therefore any losses from your activity would be deferred unless the Commissioner exercises his discretion in section 35-55 of the ITAA 1997.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that:

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

· you have met one of the four tests or would have but for special circumstances.

Consequently the Commissioner will exercise his discretion in the 2009-10 and 2010/11 financial years.

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