Edited version of private ruling

Authorisation Number: 1011762661804

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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 for the financial year ended 30 June 2010?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2002

Relevant facts and circumstances

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:

· the application for private ruling dated November 20XX,

· emails dated February 20XX and March 20XX,

· non-commercial losses evidentiary checklist,

· media release from a member of parliament 12 February 2009,

· media release from a member of parliament 22 January 2007,

· NSW Department of Primary Industries primefacts May 2007,

· Tax return data from the Storage and Access of Electronic Returns held by the ATO.

Your income for non-commercial loss purposes was over $XXX,000 in the 20XX-XX financial year.

You are a partner in a partnership that commenced business in 20XX on a property of less than 50 hectares. You currently have permanent breeding stock of 5 head. You expect to sell between 30-40 head of cattle per year at approximately $XXXX per head.

The information provided from the Department of Agriculture, Fisheries and Forestry confirms that the area of the location of your farm was drought affected from January 2007 to March 2009.

Your beef cattle farming activity was affected by the drought and as a result you were unable to sell or breed cattle in the years 20XX to 20XX. The breeding program was temporarily stopped in 20XX due to the drought but recommenced in the 20XX financial year.

You were forced to hold over cattle sales planned for the 20XX year due to the condition of the stock after the drought. This stock of cattle was sold in July 20XX and realised $XX,000 in assessable income. You intend selling further cattle prior to the end of the 20XX financial year.

You had high interest deductions in the last three years due to substantial investment in plant and equipment. The debt has now been paid out in full.

Your expenses exceeded income in the financial years 20XX-XX to 20XX-XX.

Reasons for decision

You have not satisfied the income requirement as your relevant income has exceeded $250,000. Therefore the loss from your activity will not be taken into account in the financial year ended 30 June 20XX unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997.

To apply the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity is affected in the relevant year by the special circumstances.

Unfavourable weather conditions leading to drought was outside your control and therefore it is accepted as a special circumstance as this term is used in paragraph 35-55(1)(a) of the ITAA 1997. However, for the Commissioner to exercise the discretion there must be an expectation that a profit would have been made except for the occurrence of the special circumstance.

Sales in the years preceding 2006 when your business was not affected by drought did not exceed your expenses in any year and you recorded substantial losses in each of those years.

You had planned to sell between 30-40 head of cattle per year of operation and expected $X000 per head. You expected to sell 20 head of cattle in the 20XX-XX financial year but because of the drought held them over and sold them in the 20XX-XX financial year. If you had sold them in the 20XX-XX financial year at the planned price of $X000 per head the income would not have exceeded the expenses incurred in that year. If you had sold the planned maximum of 40 head of cattle at expected price of $X000 per head in any of the financial years from 20XX-XX to 20XX-XX, which includes drought and non-drought years, the income received would not have exceeded expenses in any year.

Therefore in terms of paragraph 35-55(1)(a) of the ITAA 1997, special circumstances outside of your control may have affected your business activity in the financial year ended 30 June 20XX. However, they have not affected your business to the extent that a profit would have been made had the drought not occurred. There is no scope to allow the Commissioner's discretion under the special circumstances limb in section 35-55 of the ITAA 1997.