Edited version of private ruling

Authorisation Number: 1011769955278

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Ruling

Subject: Commissioner's discretion

Question

Will the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your fruit growing business activity in your calculation of taxable income for the 2010-11 to 2012-13 financial years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

You planted 100 fruit trees in the 2007-08 financial year.

Approximately two years later, you planted an additional 20 trees and replaced 30 or 40 that were destroyed by vermin. You now have a total of 130 trees.

You placed plastic guards around the trees and placed baits to stop the vermin.

Your area suffered from drought which lasted for about 5 years.

Because of the hot dry winds, the leaves dried up and the trees did not grow.

You were able to irrigate your trees during the drought.

Fruit trees may bear one year after planting but two and a half to three years is more common; an alternative view is five to six years.

Fruit trees produce approximately 100 fruit per year and can be sold for approximately $1 to $2 each. You also state that about 10% loss is expected per tree.

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

You do not satisfy any of the four tests set out in Division 35 of the ITAA 1997.

Your other income is more than $40,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-55(1)

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

Reasons for decision

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.

In your case, the exception is not satisfied as your other income is more than $40,000.

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 the discretion if one of the tests would have been satisfied but for the special circumstances.

In your case, you planted 100 fruit trees in the 2007-08 year of income with an addition totalling 30 some two years later. Based on the information you provided about the yield for this amount of trees you would fail to satisfy the assessable income test. This is so even if the trees were not affected by drought or vermin.

130 trees X 100 fruit each x $1.50 (average) less 10% spoiled fruit = $17,550

Therefore, while we accept that the trees were affected by special circumstances, based on your information above, you would fail to satisfy any of the four tests.

The Commissioner will not exercise the discretion under subsection 35-55(1) of the ITAA 1997 as it is considered that the factor which will prevent you from satisfying the assessable income test is the scale of your operation and not the nature of the activity or the effects of drought or vermin.

You cannot claim a deduction for your losses against other income in the 2010-11 to 2012-13 financial years. Therefore, you must defer the loss to a future year where the loss can be claimed against a profit from your business activity.