Edited version of private ruling

Authorisation Number: 1011735448077

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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 financial year?

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 2009-10 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts

You do not satisfy subsection 35-10(2E) of the ITAA 1997 due to receiving a redundancy payment from a primary production property (PPP) affected by the damage from a natural disaster.

You purchased the PPP in a particular year. The PPP was an established PPP with the first plantings made some years before.

You carried out activities to improve the variety of the product.

You projected that the income achieved in the 2009-10 financial year would be $XXX,000. The actual income achieved in that year was more than this figure.

The trading statements show an increase in costs in the 2010 financial year compared to the 2009 financial year.

The natural disaster that occurred meant that the produce was rejected owing to damage and no income was produced in the 2008-09 financial year.

In the 2007-08 financial year particular factors in the market resulted in slow sales.

Reasons for decision

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

In the 2009-10 financial year you have received a redundancy payment which has increased your income above $250,000. Your annual taxable income does not normally exceed $250,000. There is nothing in the legislation that allows an exemption from this test because of a one-off payment. Special circumstances referred to paragraph 35-55(1)(a) of the ITAA 1997 specifically refer to the business activity and do not extent to the income requirements of subsection 35-10(2E) of the ITAA 1997.

Paragraph 35-55(1)(a) of the ITAA 1997, states the Commissioner may decide that the rule in subsection 35-10(2) of the ITAA 1997 does not apply because it would be unreasonable to do so because the business was affected by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster.

Paragraph 47 of Taxation Ruling TR 2007/6 explains that special circumstances do not include ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

The particular natural disaster did not allow you to produce any income in the 2008-09 financial year due to the certain damage to the crop and the manufacturers rejecting your produce. The disaster did not damage your plants. No lingering effects of the disaster are evident in the 2009-10 financial year as a harvest of $YYY,000 exceeded your 200X projections of $XXX,000. The increase in costs, as shown in the profit and loss statements you provided, in the 2009-10 financial year compared to the 2008-09 financial year amounted to $ZZ,000. This amount in the context of the considerably higher losses in 2008-09 and 2009-10 do not factor significantly in the possible profitability of the business.

Therefore, as special circumstance were not present in the 2009-10 financial year and you would not have made a taxable profit in the 2009-10 financial year as previously projected, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 will not be exercised.

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

Section 35-10 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses for the year is less than $250,000.

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

In order to exercise the discretion allowable under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner must be satisfied that

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

· there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

Where an ongoing business activity is purchased by a new owner, the lead time period is taken from the commencement of the activity, not when the activity was purchased by the new owner.

In 200X you purchased a PPP as a going concern that was established several years before. The note at paragraph 35-55(1)(c) of the ITAA 1997 states that paragraph (c) is intended to cover a business activity that has a lead time between the commencement of the activity and the production of assessable income. The commencement of the crop growing activity commenced when the plants were planted several years before. The accepted industry lead time for the particular production is four to five years. Therefore the lead time for your business activity had already expired.

The commercially viable period for your industry has not yet been determined however the Commissioner cannot exercise the discretion of paragraph 35-55(1)(c) as the requirements of subparagraph (i) and (ii) must be met. In your case the conditions of subparagraph (i) have not been met therefore the requirements of subparagraph (ii) are not necessary for consideration.

Therefore the Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997.

There are no other discretions, exemptions or exclusions that apply to your situation. The business losses for the 2009-10 financial year will be deferred to the next financial year where they may be deductible.