Edited version of private ruling

Authorisation Number: 1011775483118

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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 losses from your primary production activity in your calculation of taxable income for the year ended 30 June 2010?

Answer

Yes.

Note:

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the income year in question. That decision can only be made in issuing you your assessment, following lodgement of your income tax return for this income year, being that for the income year ended 30 June 2010. You can lodge this return on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

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:

· your private ruling application

· financial statements for the 2008-09 and 2009-10 financial years.

You and some family members previously operated the primary production business. Since a couple of year ago you have been running the business alone.

You now run the farm full time.

Over the past X years, you have endured drought conditions and adverse seasonal conditions. Such conditions still remain.

Due to drought conditions, you cut back your animal numbers and incurred additional costs on hay and feed.

You previously had more than XXXX animals. You now have less than half this number.

Prior to the drought your grain produced $X. Proceeds for the 2009-10 financial year is less than half of this.

The primary production business made profits in the 2000-01 to 2007-08 financial years.

In the 2009-10 financial year your business made an overall loss.

You are expecting the business to make a profit in the 2010-11 financial year.

Your income for non commercial loss purposes is more than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1.

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

Income Tax Assessment Act 1997 Subsection 35-10(4).

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

Income Tax Assessment Act 1997 Section 35-55.

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

Reasons for decision

Summary

It is considered your failure to achieve a profit was due to the special circumstances envisaged under paragraph 35-55(1)(a) of the ITAA 1997. Therefore the Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 and the losses from your primary production business for the 2009-10 financial year are allowed and not deferred under section 35-10 of the ITAA 1997.

Detailed reasoning

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

Business activity

Your activity will only be potentially subject to Division 35 of the ITAA 1997 if it is carried on as a business. In your case, you advise that your primary production activity is carried on as a business.

Exception

Under subsection 35-10(4) of the ITAA 1997, there is an exception to the general rule in subsection 35-10(2) of the ITAA 1997 where the loss is from a primary production business activity or a professional arts business activity and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain).

In your case, the exception in subsection 35-10(4) of the ITAA 1997 has no application.

Subsection 35-10(2E) of the ITAA 1997

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

You do not satisfy subsection 35-10(2E) of the ITAA 1997 for the 2009-10 income year.

Therefore as you do not satisfy the income test and exception does not apply, 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.

Paragraph 35-55(1)(a) of the ITAA 1997

Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise a discretion where certain special circumstances apply. Special circumstances in this context are those outside the control of the business operator, and include drought, flood, bushfire or some other natural disaster.

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.

Information from the relevant Department confirms that the area of the location of your farm was drought affected. Unfavourable weather conditions leading to drought were 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.

In your case it is accepted that the drought and weather conditions significantly affected your business operations. As a result of the drought you have reduced your animal numbers and incurred additional costs on hay and feed. The losses from your business activities are directly related to the severe weather conditions.

Your activity made tax profits in the years ended 30 June 2001 to 30 June 2008. Therefore the Commissioner is satisfied that your farming activity would have made a profit in the year ended 30 June 2010 had it not been for the drought.

The Commissioner accepts that your business activity was affected by special circumstances that were outside your control, namely drought conditions, and that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your business activity. Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 will be exercised for the 2009-10 financial year. This means that the loss for your business activity can be taken into account in calculating your taxable income for that year.