Edited version of private ruling

Authorisation Number: 1011750731066

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Ruling

Subject: Non-commercial losses

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 activity in your calculation of taxable income?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

We previously made a ruling but you have informed us of a change in your circumstances and asked for a replacement ruling.

You have been carrying on a primary production business on a property for several years.

The property is close to an irrigation supply in the area. Water levels in the irrigation supply have been very low for a few years. Drought was officially declared for the area a number of years ago, and this has recently been revoked.

A government owned body is responsible for the irrigation supply.

The government body did not release water for irrigation purposes during the income year.

Your projected income and expenditure shows that you expect the activity to show a profit within the next couple of years.

Based on likely actual outcomes for the following income year when water was released for irrigation purposes, you have now presented an estimate of yield for the current income year based on the actual harvest in the current year and the likely outcome based on the harvest for the following income year (estimated harvest had there been adequate irrigation). This estimate shows that the activity would have shown a profit of over $20,000 in the current income year if water had been released for irrigation purposes.

Harvesting is due to commence shortly so you consider that your estimate of yield is reasonably accurate. You consider that it is likely that the activity will show a profit for the following income year.

The value of real estate utilised in the activity exceeds $500,000, and the value of the other assets employed exceeds $100,000.

Your income for the income requirement purposes exceeds $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-30

Income Tax Assessment Act 1997 Section 35-35

Income Tax Assessment Act 1997 Section 35-40

Income Tax Assessment Act 1997 Section 35-45

Income Tax Assessment Act 1997 Section 35-55

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

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. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income year(s) in question where

· but for the special circumstances, the business activity would have made a tax profit and

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

Special circumstances

Taxation Ruling TR 2007/6, which provides guidelines in relation to non-commercial business losses, discusses 'special circumstances' at paragraphs 40 to 66.

This ruling states that 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 when carrying on a business activity and affect all businesses within a particular industry. However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case by case basis.

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' as including drought, flood, bushfire or some other natural disaster. These 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.

In your case, you carry on a primary production activity. You state that your activity was affected by the decision by the government body to not provide any water allocation during the current income year. This is a factor outside of your control, and it is accepted that this is a special circumstance as discussed in TR 2007/6 above.

Tax profit for the income year

You have forwarded likely actual outcomes for the current income year based on the proposed harvest for the following income year which will commence shortly. You state that the government body did release water for irrigation purposes during the following income year.

Based on the figures provided by you, you have forecast that your activity would have had net income for the current income year. You also consider that it is likely that the activity will show a profit for the following income year.

It is therefore accepted that, but for the special circumstance discussed above, your activity would have made a tax profit for the income year.

The four tests

The four tests in question are contained in sections 35-30, 35-35, 35-40 and 35-45 of the ITAA 1997.

The assessable income test in section 35-30 of the ITAA 1997 requires that the amount of assessable income from the business activity for the year is at least $20,000. As discussed above, you have forecast that your assessable income from the activity for the current income year would have been more than $20,000 but for the special circumstance, which means that the assessable income test would have been satisfied.

Your application also indicates that the activity passes the real property test in section 35-40 of the ITAA 1997, and the other assets test in section 35-45 of the ITAA 1997.

It is therefore accepted that your activity either passes at least one of the four tests, or would have passed one of the four tests but for the special circumstance discussed above.

Conclusion

As you satisfy all of the above requirements, the Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.