Edited version of private ruling

Authorisation Number: 1011709900460

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Ruling

Subject: Non-commercial losses - Commissioner's discretion - Special circumstances - Drought

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 business activity in your calculation of taxable income for the income year?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2007

Relevant facts

You operate a crop farming activity on a property comprising more than 1000 hectares.

There is no dwelling on the property and you do not use the property for private purposes.

You do not qualify for an exception from the non-commercial loss rules as your assessable income (excluding any net capital gain) from sources not related to the activity is more than $40,000.

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

At the time of lodging the ruling request you had more than 1000 hectares of crop planted which was due to be harvested around the end of the year. This has since been harvested.

The district has been in drought since purchase and is in an area covered by the Government's 'Exceptional Circumstances - Drought' declaration.

You consider the drought in your district to be a special circumstance which prevented you making a profit in the income year.

You state that the drought that has affected all farmers in the region and that consequently, the crop harvest for the relevant years were all failures.

You have provided figures of average yields for your district from the Australian Wheat Board website. Analysis from these figures shows the relevant years to be the worst of the drought years for crop yields.

You have provided your actual production figures to date showing the low yields in the recent drought years.

You produced a particular quantity of the relevant crop in the income year which you sold for a price of $X/tonne.

You have provided your total costs for the activity for the income year.

Due to increased rainfall, the NSW Department of Agriculture newsletter estimated an average yield.

If yields had been similar to this in the income year, (i.e. if not for the drought), based on the total cost figures provided you would have made a profit.

You state that the a relevant harvest of more than 1000 hectares had good yields and you expect a good profit in a future year.

You state that your figures are similar to district averages, indicating that the property is being operated at the efficiency and effectiveness of the average of the district, but has been affected by the drought.

You have based your figures on the crop price.

Your estimated crop income in the relevant period is expected to provide a profit.

You sell your produce to the Australian Wheat Board or similar mainstream buyer at market prices.

You operate the property and employ contractors who work under your supervision.

Your have claimed large losses from your activity to date.

You have provided a copy of a drought map for the relevant month sourced from the Department of Primary Industry (NSW) website.

Reasons for decision

For the relevant and following income years there have been changes to the non-commercial losses legislation to limit the circumstances where business losses can be offset against other income.

The introduction of the income requirement test means that individuals with an adjusted taxable income for non-commercial loss purposes in excess of $250,000 for that year will not get access to the four tests. To be able to claim your losses in that year you have to be granted the Commissioner's discretion under section 35-55 of the ITAA 1997 or meet one of the exclusions.

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 where it is accepted that special circumstances in the sense in which this term is used in Division 35 of the ITAA 1997 applies.

Where the Commissioner is satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to an activity any loss for your activity can be taken into account in calculating your taxable income for the relevant year.

In your case you do not meet any of the exclusions and you have not satisfied the income requirement as your relevant income has exceeded $250,000. Therefore the loss from your activity will not be taken into account in the year unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997.

To apply the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity is affected in the relevant year by the special circumstances.

Your crop farming activity has been affected by the drought and as a result you had lower yields. As a consequence your potential assessable income was reduced by the impact of the drought in the year.

The information provided from the Department of Primary Industry confirms that the area around the location of your farm was drought affected. Unfavourable weather conditions leading to drought were outside your control and it is accepted as a special circumstance as this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

In your case, the Commissioner is satisfied that your crop farming activity would have made a profit in the year had it not been affected by drought. Consequently the Commissioner will grant a discretion under paragraph 35-55(1)(a) of the ITAA 1997 to allow you to offset your losses from crop farming against your off farm income.