Edited version of private ruling

Authorisation Number: 1011771490355

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Ruling

Subject: Commissioner's Discretion Non Commercial Losses

Question 1

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 livestock farming activities in your calculation of taxable income for the 2009-2010 income year?

Answer

No

This ruling applies for the following period:

I July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Relevant facts

The taxpayer operates a primary production business activity in a partnership.

The taxpayer's income for non-commercial loss purposes is more than $250,000.

The taxpayer advised as a result of drought the average sale price of the taxpayer's livestock fell in 2009 -2010 while they had to incur additional expenses for fodder and fuel due to the effect of the drought.

The taxpayer advises that they pass the Real Property test and the Other Assets test.

The assessable income of the activity in the year ended 2010 was greater than $20,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35
Income Tax Assessment Act 1997 Subsection 35-10
Income Tax Assessment Act 1997 Subsection 35-10 (2)
Income Tax Assessment Act 1997 Subsection 35-10(2E)
Income Tax Assessment Act 1997 Subsection 35-10 (4)
Income Tax Assessment Act 1997 Subsection 35-30
Income Tax Assessment Act 1997 Subsection 35-35
Income Tax Assessment Act 1997 Subsection 35-40
Income Tax Assessment Act 1997 Subsection 35-45
Income Tax Assessment Act 1997 Subsection 35-55
Income Tax Assessment Act 1997 Subsection 35-55(1)(a)

Summary

The Commissioner is satisfied that your business has been affected by special circumstances (drought), but it is considered your failure to achieve a profit was not due to the drought as envisaged under paragraph 35-55(1)(a) of the ITAA 1997. Therefore the Commissioner will not exercise the discretion and the losses from your primary production business for the 2009-10 income year are not allowed and will be deferred under section 35-10 of the ITAA 1997.

Detailed reasoning

For the non-commercial losses rules to apply to an individual they have to be carrying on a business for taxation purposes. It is accepted that you are carrying on a business. The effect of the non-commercial losses legislation is to restrict the circumstances where a business loss can be offset against other income.

Division 35 of the ITAA 1997 applies to losses from certain business activities.

Prior to the 2009-10 income year if you could pass one of four tests as per section 35-10 of the ITAA1997, obtained the Commissioner's discretion or if an exception applied, the losses could be offset against your other income.

For the 2009-10 and later income years under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the exception in subsection 35-10(4) of the ITAA 1997 applies,

· you satisfy subsection 35-10(2E) of the ITAA 1997 and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or

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

Subsection 35-10(4) of the ITAA1997 if you have a loss from a primary production or professional arts business activity and your assessable income from sources not related to that business activity is less than $40,000 in an income year, you can claim your loss in that income year.

Your assessable income from other sources not related to your business activity is more then $40,000 therefore you do not satisfy subsection 35-10(4) of the ITAA 1997 for the 2009-10 income year

The income requirement in subsection 35-10(2E) of the ITAA 1997 applies from 1 July 2009 and will be met where the sum of the following amounts for an income year is less than $250,000:

· taxable income (ignoring losses subject to the non commercial loss rules)

· reportable fringe benefits

· reportable superannuation contributions

· net investment losses

Your income for non-commercial loss purposes is more than $250,000, therefore you do not satisfy subsection 35-10(2E) of the ITAA 1997 for the 2009-10 income year.

You do not satisfy the income requirement and the exception does not apply, therefore the losses from your activities will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997 that it would be unreasonable to defer the loss.

You have asked the Commissioner to consider that your business activity has been affected by drought (special circumstances).

Special circumstances

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:

(c) affected by special circumstances outside the control of the operator of the business activity; and

(d) the impact of the special circumstance on the business is such that it would be unreasonable for the Commissioner to defer a loss incurred in that year.

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.

It is accepted that your business activity has been affected by drought which is considered special circumstances.

For those individuals who do not satisfy the income requirement 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.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion, sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997:  

"…In the context of Division 35 special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

Although not limited to natural disasters, paragraph 35-55(1)(a) refers to 'special circumstances' as including drought, flood, bushfire or some other natural disaster. These events are taken to be special circumstances outside the control of the operators of the business activity.

The special circumstances must have affected the business activity. Some indicators of the effects on the business activity that could lead to the exercise of the discretion in regard to the special circumstances limb are:

· destruction of stock or equipment

· delays in ploughing, planting, harvesting etc

· delay in growth of crops

· inability of operator to perform duties and

· loss of business opportunities.

In the situation where a business activity would have failed to satisfy a test even if the special circumstances had not occurred, it is unlikely that the Commissioner would consider it to be unreasonable for the loss deferral rules to apply and therefore the Commissioner would be unlikely to exercise the discretion…"

The commissioner accepts that there were special circumstances of drought. However you have failed to show the special circumstances of drought prevented your business activity from making a tax profit.

It is considered that although there are special circumstances in the 2010 income year, you have failed to show how the business activity would have made a tax profit except for the special circumstances of drought.

Therefore the Commissioner is unable to grant a discretion under subsection 35-55(a)(1) to include any losses from your beef livestock farming activity in your calculation of taxable.