Edited version of private ruling

Authorisation Number: 1011771511462

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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question

Will the Commissioner exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include your loss from your primary production activity in calculating your taxable income for the 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 2009

Relevant facts and circumstances

You are a partner in a primary production activity which commenced over ten years ago.

You raise and sell animals.

Your primary production activity incurred a loss in the 2009-10 financial year.

During the 2009-10 financial year you received a lump sum payment which covered a large period of time.

You do not meet the income requirement under subsection 25-10(2E) of the ITAA 1997 as a result of the receipt of the lump sum payment.

This ruling is given on the basis that your primary production activity is carried on as a business for tax purposes.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 35-55.

Reasons for decision

Summary

The Commissioner's discretion has not been exercised to allow you to offset the losses from your primary production activity against your other income as failing the income requirement due to an arrears payment of compensation is not considered to be a special circumstance which affected the business activity. Nor is your activity within the commercially viable period for your activity's industry.

Detailed reasoning

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as a sole trader or a partner in a partnership and made a loss from that business activity.

From 1 July 2009 you must also meet an income requirement (along with certain other tests), in order to include losses from a business activity in your taxable income calculation.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

Section 35-55 of the ITAA 1997 contains the provisions which allow the Commissioner to grant his discretion to enable you to offset the loss from a business activity against your other income in the year concerned.

Under paragraph 35-55(1)(a) of the ITAA 1997 the Commissioner may exercise his discretion where the business activity is affected by special circumstances outside of the control of the operators of the business. Such circumstances are specifically defined to include, but are not limited to, drought, flood, bushfire or some other natural disaster.

For individuals who do not satisfy the income requirement in subsection 35-10(2E) of ITAA 1997 the 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 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 at lease one of the four tests.

Paragraph 35-55 (1)(c) of ITAA 1997 states if you do not meet the income requirement, the discretion may also be exercised, in the income year in question, for a business activity that

· has started to be carried on

· has not produced, or will not produce, assessable income greater than the deductions attributable to it, and

· there is an objective expectation, based on evidence from independent sources (if available) that the activity will produce a tax profit within a period that is commercially viable for the industry concerned.

This discretion is intended to cover a business activity that has a lead time between the commencement of the activity and when a tax profit will be produced. The example given in the taxation legislation is an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

Application to your circumstances

You commenced your primary production activity over ten years ago.

Your taxable income for non-commercial loss purposes exceeds $250,000 due to a lump sum payment in arrears.

Special circumstances

Failing the income requirement due to the arrears payment of compensation is not considered to be a special circumstance within the meaning of paragraph 35-55(1)(a) of the ITAA 1997. The legislation states that the relevant discretion applies where the 'business activity was or will be ... affected by special circumstances' (emphasis added). The receipt of the lump sum payment does not relate to, and is separate from, your primary production activity.

Therefore, the Commissioner will not grant his discretion to allow you to offset the losses from your primary production activity against your other income due to special circumstances.

Lead time

Information available to the Commissioner indicates that the commercially viable period for your activity's industry is two to three years.

As your primary production activity commenced over ten years ago the commercially viable period has passed. Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

Therefore, the Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997.