Edited version of private ruling

Authorisation Number: 1011754303213

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Ruling

Subject: Non-commercial losses - Special circumstances

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 for the 2009-10 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You commenced your primary production activity more than ten years ago.

During the past few years, you have suffered from drought conditions which meant that you had additional costs for fodder and agistment (approximately $XXX) in the 2009-10 financial year.

You incurred interest charges of approximately $XXX.

You turned XX years old during the 2009-10 financial year and in accordance with your long term plan, you accessed the proceeds of maturing investments. You did not have access to these funds prior to turning XX.

This enabled you to contribute a large sum to the business which retired all of the debt owing on the property.

Contributing to the loss was a one off small business tax break of approximately $XXX.

You incurred a loss for the year of approximately $XXX.

Your activity meets the income test and the real property test.

Your taxable income for non-commercial loss purposes is above $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

Income Tax Assessment Act 1997 - Subsection 35-10(2E).

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

Reasons for decision

For the 2009-10 and later financial years division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless:

· the individual's business activity meets one of the four tests and the income requirement is also satisfied;·
· the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997; or

· the individual comes within the Exception contained in subsection 35-10(4) of the ITAA 1997.

(refer subsection 35-10(1) of the ITAA 1997).

You have not satisfied the income requirement as the relevant income exceeds $250,000 and the Exception in subsection 35-10(4) of the ITAA 1997 does not apply. Losses made from the activity in this year are therefore subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides under paragraph 35-55(1)(a) of the ITAA 1997 that it would be unreasonable for this to occur.

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

In your case, you meet the income test and the real property test.

You advise your activities have been affected by drought for a few years. However, from the information you have provided, the amount of the extra expenses you incurred to feed and to agist the livestock is not excessive and while they contributed to the loss, it is clear that you would not have made a profit in the 2009-10 financial year without these additional expenses.

You further stated that the interest you are paying contributed significantly to the loss and that the loan has now been paid and the interest will not contribute to a loss in a future year. While we accept that you did not have access to the funds to pay down the loan at an earlier stage, the cost of ongoing interest expenses is not a special circumstance as envisaged in paragraph 35-55(1)(a) of the ITAA 1997.

In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the 2009-10 financial year.