Edited version of private ruling

Authorisation Number: 1011771655072

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Ruling

Subject: Commissioner's discretion

Questions:

1. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your farming enterprise in the calculation of your taxable income for the 2009-10 to the 2015-16 financial years?

Answer: No.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your farming enterprise in the calculation of your taxable income for the 2009-10 financial year?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commenced on

1 July 2009

Relevant facts

You commenced your farming activities prior to the 19XX financial year.

Your activities have never produced a profit but in the 200X-XX financial year your business loss was reduced by two thirds of the previous year.

In the 200X-XX financial year, your activities produced assessable income in excess of $1X0,000.

Your farming activities have been affected by a prolonged drought followed by excessive rains. These events affected your product yields and added additional costs and, therefore, reduced your profitability.

You have provided independent evidence on the commercial viability of your farming enterprise. They conclude that, based on industry averages, your activities have the potential to produce income greater than the expenses attributable to it.

Your farm budget for the 2010-11 financial year projects total income of over $1X0,000 and total expenses of less than $1X0,000; resulting in a small profit.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1

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

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

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a)

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c)

Reasons for decision

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

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.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000.

In order to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner must be satisfied that there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

For the Commissioner to exercise the discretion, you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

You have provided independent evidence which states that your activities have the potential to become commercially viable at some time in the future, however, it does not include the commercially viable period for your type of business activities generally.

In your case, you commenced your farming activities prior to the 1998-99 financial year and you have stated that you expect your activities will produce income greater than the expenses attributed to them after the 2015-16 financial year. This is at least 17 years after your activities commenced.

Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business activity is 17 years.

The reason your business activity is producing a loss is peculiar to your situation and is not inherent to the nature of the business.

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 subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997.

Special circumstances

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. TR 2007/6 states at paragraph 47 to 53 of this Ruling:

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. 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. 

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

You have stated that your business activities have experienced a prolonged drought followed by excessive rains. These events affected your product yields and added additional costs and, therefore, reduced your profitability.

These events were outside of your control and, therefore, are accepted as 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

Your farming activities have never made a tax profit. However, in the 2009-10 financial year, your losses were greatly reduced from previous years and, had your product yields been higher, your activities would have produced a profit. These activities have also produced over $1X0,000 in assessable income in the 2009-10 financial year. In addition, the farm budget you provided with your application indicates that your primary production enterprise is expected to produce a profit from the 2010-11 financial year.

The Commissioner is satisfied that your farming activities would have made a profit in the year ended 30 June 2010 had it not been affected by special circumstances. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 financial year.