Edited version of private advice

Authorisation Number: 1012619280076

Ruling

Subject: Commissioner's discretion - Non-commercial losses

Question and answer

1. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include any losses, in relation to the restoration of your business activity, in your calculation of taxable income over a number of income years?

No.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business activity in your calculation of taxable income for an income year a profit would not have been made if it was not for the special circumstances?

No.

3. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business activity in your calculation of taxable income for two income years a profit would have been made if it was not for the special circumstances?

Yes.

This ruling applies for the following period(s)

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• The application for private ruling.

• Further information.

You purchased an established business, which has been in operation for many years.

When you purchased the business you were aware the produce had suffered from neglect by the previous owners and were affected with disease.

The disease, if not treated, impacts upon the yield and life span of the produce.

You removed the produce which were considered beyond saving, severely pruned, replaced wiring and implemented strategies to maintain the soil.

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997.

You made a loss over a number of years.

You submit that you were affected by special circumstances in those years.

In the main harvest period of the business activity substantial rain fell and continued intermittently throughout the harvest period.

In a following year the business activity was affected by a hailstorm.

You have submitted the following evidence to substantiate your claim:

• Rain fall charts.

• Industry articles.

• Photos of hailstorm damaged produce.

• Early estimate of yields the years in question.

• Summary of actual yields harvested in the years in question.

• Emails between the business activity and purchasers of the produce.

• Financial statements for the years in question.

• Emails provided by your representative.

You submit that the special circumstances impacted on the profitability of your business in the following ways:

• The rain triggered the spread of disease in the produce which significantly impacted upon yield as well as the quality.

• Due to the rainfall fungicide spraying occurred in an endeavour to control the outbreak of disease.

• Your estimated harvest, for the years in question, was significantly reduced.

• The hailstorm damaged produce at a crucial stage of development, which do not regenerate thus severely impacting upon the yield.

• The tonnage sold was significantly reduced due to the hail storm and should the hail storm not have hit the purchasers of the produce would have purchased an additional tonnage.

You intend to return to profit in the coming income year.

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 subsection 35-10(2E)

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

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

Reasons for decision

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless:

• you satisfy the income requirement and you pass one of the four tests,

• the exceptions apply, or

• the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion 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

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

Having regard to your circumstances, Taxation Ruling TR 2007/6, at paragraph 58, states;

…the acquisition of a poorly run but promising business activity would generally be considered to be within the control of the business operator and as such would not, by itself, constitute special circumstances, even though the actions of the former operator may have been outside the control of the current operator.

Consequently, the Commissioner will not exercise his discretion in paragraph 35-55(1)(a) of the ITAA 1997, for the restoration of the business activity and allow you to include any losses, from your business activity, in your calculation of taxable income.

You have advised that for one financial year the business activity would not have made a profit if it was not for the special circumstances.

Therefore, the Commissioner will not exercise his discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the financial year in which a profit would not have been made if it was not for the special circumstances.

However, it is accepted that your business activity was affected by special circumstances in respect to high rainfall in an income year, which impacted on another income year and a hail storm in another income year which was 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.

Therefore the Commissioner will exercise his discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the affected income years.

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