Edited version of private ruling

Authorisation Number: 1011761647560

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 - 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 activity in your calculation of taxable income for the 2009-10 and 2010-11 financial years?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

01 March 1966

Relevant facts

Your adjusted taxable income for non-commercial loss purposes is more than $250,000 in the 2009-10 financial year.

You have operated a livestock farming operation for many years.

In good years when sufficient rainfall is received for growing pasture and filling the dams the property is able to support up to X head per hectare, equating to a maximum carrying capacity of approximately X heads.

The farm generates income from selling the live livestock and livestock products.

You operate the farm yourself as well as employing two permanent employees and casuals when required.

This is your only business operation.

You state that the special circumstances for the primary production operation incurring a loss is due to one of the most severe droughts ever being experienced in your region.

The farm was running approximately X head of livestock in the 2006-07 financial year but with the drought effecting water supplies and pastures most of this stock had to be sold off so that by the end of 2009 the farming operation was only running approximately X head of livestock.

Even to keep these numbers, water had to be carted in and feed purchased.

The farming operation will take a number of years to build its numbers back up to X head of livestock.

The farming operation will also need to outlay significant fertilizer costs to restore the pastures to a productive state.

You have provided the financials of the farming operations for the last few years to show the drop in stock numbers over this period and also the significant size and scale of the primary production business.

You have also provided a report from the Australian Bureau of Agricultural and Resource Economics (ABARE) showing the negative business profits from your industry for 2008/09/10 to support your case for special circumstances.

You expect that your farming activity will show a profit in the 2011-12 financial year.

You have met the assessable income test in all years since the non-commercial loss legislation began.

In your profit and loss figures for the past X years, you show a profit in the X years before the drought, and losses in the most recent years (due to the drought).

You have provided estimated profit and loss figures, showing that you may have made a profit, but for the drought.

You have provided details of differences you have estimated in income and expense items for the 2009-10 financial year due to the drought.

You estimate that, if not for the drought, the income in the 2009-10 financial year would have increased and expenses would have increased, resulting in a profit.

Your livestock trading accounts provided showed the numbers of livestock sold, including sale numbers steadily increasing until a sharp decrease in the 2009-10 financial year.

You estimate that you could have sold approximately X stocks in the 2009-10 financial year if not for the drought.

In the 2010-11 financial year, you expect to sell around X stocks but you estimate that you could have sold around X stocks if not for the drought (at an expected average price of $XX).

Reasons for decision

For the 2009-10 and later income years, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless:

· you meet the income requirement - section 35-10(2E) - and you pass one of the four tests - section 35-30, 35-35, 35-40, 35-45

· the exceptions contained in section 35-10 of the ITAA 1997 apply; or

· the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

In your situation, you do not satisfy the income requirement (that is, your adjusted taxable income, excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions in section 35-10. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion contained in paragraph 35-55(1)(a) may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'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, including drought, flood, bushfire or some other natural disaster.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your 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.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that, for the years question:

· but for the special circumstances, you would have made a profit; and

· you have met one of the four tests or would have but for special circumstances.

Consequently, the Commissioner will exercise his discretion in the 2009-10 and 2010-11 financial years.

Note:

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the financial year in question. That decision can only be made in issuing you your assessments, following lodgment of your income tax returns for the years subject to the ruling. You can lodge these returns on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.