Edited version of private ruling

Authorisation Number: 1011679779117

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Non commercial losses

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 2009-10 to 2011-12 income years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts

You have a primary production enterprise.

You commenced this business several years ago.

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

You are an employee who travels overseas for lengthy periods of time for your work.

Because of the needs of your current employment contract, you need to employ a person to look after the farm on a day to day basis.

You employ a labourer on a casual basis for 20-40 hours per week to do farm work and supervise the farm worker who controls weeds. The cost for this employment is over $25,000 per year.

Your farm is in a region which is seriously affected by a weed. The only satisfactory way of controlling this weed is by spot spraying by hand or removal by hand with a mattock.

You also have a casual employee for approximately 30 hours per week. Most of this time is spent on weed control which you are obliged to do under the Department of Sustainability and Environment guidelines. The cost of this non-productive work and chemicals and plant depreciation is between over $25,000 per annum.

The weeds can develop on any part of the property which is not sown to crop. You crop about 30% of your property with the remainder used for grazing.

The weed has been in your area for many years and is an ongoing problem. You work hard to ensure you keep the weed under control because the seeds can easily spread to adjoining properties. The weeds are worse in the dry years when there is little ground cover.

Initially you employed rock removal contractors to remove rock from areas which could be sown to improve pasture or crop. On the hillsides where there was too much rock to remove, you fenced off these areas, which is only a small percentage of the total property, and you planted more than 15,000 native trees. In other areas, you and other members of the family regularly spot spray the pastures at the weekends and holiday. You have a heavy investment in plant for spot spraying of weeds.

You totally comply with all the statutory requirements in relation to the weeds and are in control of the situation. Your property has very limited weed at present.

During the past decade, there have been unfavourable weather conditions in the region, with severe water shortages. This has meant cutting back your livestock numbers with a consequent reduction in income.

From 199X to 200Y, the rainfall in your area has been below average, that is, less than 400mm per annum. Despite attempts, you have failed to get a drought classification in your area. The reason has been that you have had summer rains which distort the data.. However, the ground cover you now have is back to the conditions last experienced some years ago.

Only in this year has the historical annual rainfall figure been exceeded.

The late rains this year have damaged your crops but improved pasture conditions. Therefore you will have reduced costs for feeding stock.

At the same time in 2009-10 income year, crop prices were depressed to the lowest for 25 years and the rains that occurred during harvest time damaged crops, making sale 25% of the previous year. The net result has been a $15,000 - $25,000 reduction in net farm income.

You had assessable income from your primary production activities of more than $20,000 for the 2009-10 income year.

In the 2010-11 income year you have sold two years of produce, made a good sale on stock reduction. Although the crop yields will be lower due to the late rains, you expect income to exceed $100,000.

Conditions for the 2011-12 income year look more positive if you can maintain and rebuild the stock numbers.

In 2012-13 income year, you forecast a profit. In that year will work only on the farm and will not need to employ the casual staff.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-1

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

Income Tax Assessment Act 1997 Subsection 35-10(4)

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

Income Tax Assessment Act 1997 Section 35-55.

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

Reasons for decision

Summary

It is considered your failure to achieve a profit was not due to the special circumstances envisaged under paragraph 35-55(1)(a) of the ITAA 1997. Therefore the Commissioner will not exercise the discretion and the losses from your primary production business for the 2009-10 to 2011-2012 income years are not allowed and will be deferred under section 35-10 of the ITAA 1997.

Detailed reasoning

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the exception in subsection 35-10(4) of the ITAA 1997 applies,

· you satisfy subsection 35-10(2E) of the ITAA 1997 and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or

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

Business activity

Your activity will only be potentially subject to Division 35 of the ITAA 1997 if it is carried on as a business. In your case, you advise that your primary production activity is carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on the business of primary production.

Exception

Under subsection 35-10(4) of the ITAA 1997, there is an exception to the general rule in subsection 35-10(2) of the ITAA 1997 where the loss is from a primary production business activity or a professional arts business activity and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain).

In your case, the exception in subsection 35-10(4) of the ITAA 1997 has no application.

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

The income requirement in subsection 35-10(2E) of the ITAA 1997 applies from 1 July 2009 and will be met where the sum of the following amounts for an income year is less than $250,000:

· taxable income (ignoring losses subject to the non commercial loss rules)

· reportable fringe benefits

· reportable superannuation contributions

· net investment losses

You do not satisfy subsection 35-10(2E) of the ITAA 1997 for the 2009-10 income year. You indicate that this will also be the case in the 2010-11 and 2011-12 income years.

Therefore as you do not satisfy the income requirement and the exception does not apply, the losses from your activities will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997 that it would be unreasonable to defer the loss.

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

Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise a discretion where certain special circumstances apply. Special circumstances in this context are those outside the control of the business operator, and include drought, flood, bushfire or some other natural disaster.

The note to paragraph 35-55(1)(a) of the ITAA 1997 states that 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.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 54 of this Ruling. 

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all business within a particular industry. 

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. Also oil spills and explosions may also be considered to be special circumstances. Such events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity.

It is clear that 'special circumstances' will be something out of the ordinary or unusual. It will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has resulted in the business activity failing to pass a test. Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by 'special circumstances' in the sense in which this term is used in paragraph 35-55(1)(a), as the Note to the paragraph indicates.

You have stated that the region in which your property is situated experienced unfavourable weather conditions. Your region was not officially recognised as being in drought. The rainfall received has been below 400mm and often falling at unsuitable times for your primary production activities. Although the weather may be unfavourable, there is insufficient information to show that the rainfall is outside the range of ordinary fluctuations for the region.

You advised that the weed situation on your property is not out of the ordinary and is currently under control. As the weeds have been in the area since the 1990s and are an ongoing problem, the associated costs are not considered special for section 35-55 of the ITAA 1997 purposes.

It is not considered that your individual circumstances are special circumstances outside of your control as referred to in paragraph 35-55(1)(a) of the ITAA 1997.

In summary, the discretion in paragraph 35-55(1)(a) of the ITAA 1997 will not be exercised for the 2009-10, 2010-11 and 2011-12 income years, and the loss deferral rule will therefore apply to losses made from your business activity in those years. On the material provided with your application for a private ruling the Commissioner cannot be satisfied that special circumstances have and will affect your business activity for these years in the way described in paragraph 35-55(1)(a) of the ITAA 1997. In particular, this material does not demonstrate that these losses, but for the circumstances referred to, would or will not have been made.