Edited version of private ruling

Authorisation Number: 1011747901181

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Ruling

Subject: Commissioner's discretion

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 primary production enterprise in the calculation of their taxable income for the year ended 30 June 2010?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You invested in a primary production project in 2000.

In the last five years your investment has produced profits in two years and losses in three, including the current year. However, overall the profits from the project are greater than the losses.

In the two previous loss years, the activity was adversely affected by drought conditions in the area along with severe frosts. Rain events at the time of harvest also affect the quality of the product.

In the 2009-10 financial year, the harvest was down 57% due to extreme heat early in the growing stages and significant rain events prior to harvesting.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-55

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

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

Reasons for decision

Section 35-1 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 income for non-commercial loss purposes 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.

The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

You have provided a manager's report for the 2009-10 season detailing the affects of extreme heat early in the growing stages, and significant rain events prior to harvesting which produced the worst year financially for the investment. As a result of these events, the harvest was reduced by 57% and the quality of the product was down graded. Consequently, the income from sales was greatly reduced (on previous years) resulting in an overall loss for the financial year. These circumstances, in the form of extreme heat and significant rain events, were outside your control and, therefore, are accepted as a 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

Your primary production activities have made tax profits in two of the last five years, with greater profits than losses being produced overall during this period. These activities have also produced over $80,000 in assessable income in the current financial year. The inherent profitability of the activities, as evidenced by its strong past performance, leads the Commissioner to conclude that, while not relevant for the purposes of paragraph 35-55(1)(a), the activity is 'commercial' in the sense indicated by the scheme of Division 35. The Commissioner is satisfied that your primary production activities would have made a profit in the year ended 30 June 2010 had it not been affected by these weather events.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 financial year.