Edited version of private ruling

Authorisation Number: 1011755603018

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

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

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling,

· non-commercial losses evidentiary checklist,

· business plan

· profit and loss statement for the period 1 July 2009 to 30 June 2010,

· projected income and expenditure statement 2010-11 and 2011-12,

· profit and loss projections for 2010-11

· opinion from tax agent

· individually droughted property application.

Email received during 2011 with an itemised list of the affect of the drought on profits.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year.

You operate a primary production operation on a number of properties.

Your properties have been affected by drought and two of your properties were declared individually droughted properties between during the 2010 year.

During 20XX you sold a property and purchased an adjoining property and also spent funds stocking all properties.

You made a loss from your primary production activities for the 2009-10 financial year.

You have stated that the affect of the drought on your profit was greater than the loss from your primary production activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-55

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

Reasons for decision

For the 2009-10 and later income 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.

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) 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) 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.

You have provided information supported by independent evidence that demonstrates the primary production activity was in a drought affected area. As a result of the drought you sold some of your product at a reduced price. Consequently your assessable income was reduced and combined with the additional expenses incurred resulted in a loss for the income year. This circumstance, in the form of the drought, was outside your control and therefore it is accepted as a 'special circumstance' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

You have passed three of the four tests and based on the information you provided and the Commissioner is satisfied that the primary production activity would have made a profit in the year ended 30 June 2010 had it not been affected by drought.

Consequently the Commissioner concludes that the requirements of paragraph 35-55(1)(a) of the ITAA 1997 have been met and it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 to defer the loss for the 2009-10 financial year.