Edited version of private ruling

Authorisation Number: 1011779135835

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Ruling

Subject: 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 primary production activity in your calculation of taxable income for the 2009-10 to 2011-12 financial years?

Answer: Yes.

Question 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 primary production activity in your calculation of taxable income for the 2012-13 financial year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

The arrangement that is the subject of the 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,

· actual and projected income and expense figures for past and future financial years

· additional information received in April 2011.

You have a primary production business of breeding, maintaining and selling of animals.

You commenced this business in 2002.

In 2002-03 and 2003-04 financial years, the business made profits.

However, the property has suffered from drought for several years which only lifted with recent floods.

The drought has affected the carrying capacity of your property and sales. It has also increased your expenditures on water and irrigation infrastructure. Expenditure included new pumps, shed and dam.

You have provided articles to show that in 2010, the Exceptional Circumstances (EC) drought assistance funding was extended in your area for another 12 months.

Traditionally, the area of your farm has not been irrigation dependent, because historically it has been somewhat of a green belt, receiving regular and reliable rainfall. However, in the last 12 years, this has changed.

You have provided data of the rainfall received in the last 20 years.

Total sales over the past eight years has been equal to approximately half of the sales that would occur without the drought.

Given the right conditions, you predict that the business will grow to produce greater gross sales by 2014-15 financial year without a significant increase in costs. You expect to make a profit in the 2013-14 financial year.

The recent floods have now caused extensive damage. Your insurance company has denied liability for the damage. You have already committed to spending money on repairs to fences, tree lines, sheds and other infrastructure.

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

A locally based person helps manage the property on a part time basis. There are no other paid employees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 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 in the 2009-10 to 2011-12 financial years is due to the special circumstances envisaged under paragraph 35-55(1)(a) of the ITAA 1997. Therefore the Commissioner will exercise the discretion and the losses from your primary production business for the 2009-10 to 2011-12 financial years will not be deferred under section 35-10 of the ITAA 1997.

However, the Commissioner is not satisfied that the effects of the drought and flood will continue to the 2012-13 financial year and create the loss. Therefore the Commissioner will not exercise the discretion for this year.

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. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on the business of primary production.

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 financial year. You indicate that this will also be the case in the 2010-11 to 2012-13 financial years.

Therefore as you do not satisfy the income requirement and the 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, including those such as drought, flood, bushfire or some other natural disaster, that have affected that activity.

Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner may decide that the rule in section 35-10 of the ITAA 1997 does not apply to a business activity if the Commissioner is satisfied that it would be unreasonable to apply that rule.

It is intended that the Commissioner exercise this discretion if the business would have made a profit but for the special circumstances.

In your case it is accepted that the drought, flood and adverse weather conditions significantly affected your business operations. The reduction in sales and the increased expenditure in water and irrigation infrastructure are directly related to the severe weather conditions.

The Commissioner accepts that your business activity was affected by special circumstances that were unusual and outside your control, namely drought and flood conditions, and that in the absence of those circumstances it was probable that the business would have been, or would be, profitable for the 2009-10 to 2011-12 financial years.

Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 will be granted for the 2009-10 to 2011-12 financial years. This means that any 'loss' for that activity can be taken into account in calculating your taxable income for each of those years.

However, based on the current information, the Commissioner will not exercise a discretion in relation to special circumstances for the 2012-13 financial year. The Commissioner is not convinced that there will be special circumstances outside of your control as referred to in paragraph 35-55(1)(a) of the ITAA 1997 that will affect your business in that year. Therefore, based on the current facts, the loss deferral rule will apply to losses made from your business activity in that year.

Please note, if further floods and/or drought conditions occur between now and then, then a discretion may be exercised.