Edited version of private ruling

Authorisation Number: 1011750989657

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Ruling

Subject: non-commercial losses and the Commissioner's discretion

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include your share of losses from the partnership agricultural activity in the calculation of your taxable income for the 2009-10 financial year?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a partner in a partnership which operates a primary production activity.

You irrigate your produce with water pumped from a river.

Due to the severe drought affecting your area, the water allocation has been severely restricted by a government department. Accordingly, yields available from your crops have decreased dramatically.

In the 2009-10 financial year your water allocation was restricted to approximately XX% of the unrestricted allocation. If the water allocation returned to somewhere closer to full allocation, both the produce quality and yield would be substantially improved, thereby allowing the block to produce similar yields to 2006.

In the 2009-10 financial year, the total gross income from this activity was less than $20,000.

If there were no water restrictions, you expect your activity would have produced a much higher yield and the total gross income would have exceeded $20,000 based on the current year's market prices.

You believe you would have passed the assessable income test but for the special circumstances in the 20009-10 financial year.

You have not satisfied any of the four tests set out under Division 35 of the ITAA 1997. The exception under subsection 35-10(4) of the ITAA 1997 does not apply.

This ruling has been prepared on the basis that your primary production activity is being conducted as a business.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10,

Income Tax Assessment Act 1997 Section 35-55 and

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

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as:

· a partner in a partnership that made a loss, or their net partnership distribution after deducting any eligible expenses resulted in a loss, or

· a sole trader (including an individual in a general law partnership) and made a loss

If you are in business (for tax purposes) you can only offset the loss from a business activity against your income from other sources if you pass one of four tests, an exception applies to you or the Commissioner exercises his discretion in your favour.

The four tests are:

i) you have assessable income from the business of at least $20,000

ii) you have made a profit from the business in at least three out of the last five years

iii) you use real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business, or

iv) you actively use other assets worth at least $100,000 (excluding motor vehicles) in the business.

The exceptions to passing the four tests apply where you carry on a professional arts business or a business of primary production. You may offset your business loss against your other income if your other income for that year is $40,000 or less.

The Commissioner may exercise his discretion to allow you to claim your business loss where special circumstances apply. Special circumstances in this context are those outside the control of the business operator, including those such as drought, flood, bushfire or some other disaster, that have materially affected that activity.

It is intended that the Commissioner only exercise this arm of discretion if one of the tests would have been satisfied but for the special circumstances.

The Commissioner accepts that your primary production activity was affected by the decreased water allocation which was a result of the drought in your area and outside of your control and that in the absence of the reduction it was probable that you would have passed the assessable income test in the 2009-10 financial year.