Edited version of private ruling

Authorisation Number: 1011780806827

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Ruling

Subject: Non-commercial losses and Commissioner's discretion

Question 1

Is the income requirement contained in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied?

Answer

No.

Question 2

Will the Commissioner exercise the discretion under section 35-55 of the ITAA 1997 to allow you to include your loss from your farming activities 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 partnership and the beneficiary of a unit trust where the trustee carries on a primary production business.

The unit trust is the main operating enterprise for the farming operations while the partnership is the funding vehicle and undertakes all conservation improvements on the various rural properties used in the enterprise.

In a prior financial year you received a trust distribution in excess of $250,000. Of this, you deposited in excess of $250,000 into a farm management deposit (FMD) account. The partnership incurred a loss during this financial year.

In a subsequent financial year you withdrew the total amount of the FMD and injected these funds into the farming enterprise.

The enterprise made a loss during this subsequent financial year, which includes losses from both the trust and partnership.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2G Section 393-15
Income Tax Assessment Act 1997 Section 35-10
Income Tax Assessment Act 1997 Subsection 35-10(2E)
Income Tax Assessment Act 1997 Section 35-55
Income Tax Assessment Act 1997 Section 393-25

Reasons for decision

Summary

You do not satisfy the income requirement as the repaid farm management deposit (FMD) does not form part of the assessable income 'from' your partnership business activity and is included in your adjustable taxable income.

The Commissioner's discretion has not been exercised to allow you to offset the losses from your farming activities against your other income as the making and repaying of an FMD is not considered to be a special circumstance outside of your control.

Detailed reasoning

Income requirement

For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply, or

· the Commissioner exercises his discretion.

The income requirement prevents you from accessing the four tests where your adjusted taxable income exceeds $250,000 (that is, the sum of your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses but excluding your business losses).

However not all of your assessable income is included in calculating your adjusted taxable income. Any assessable income attributed to the business activity incurring the loss is not included in your adjusted taxable income. This is because it forms part of the business losses, which are disregarded (the business losses are calculated by deducting the expenses attributed to the business activity from the assessable income 'from' that business activity).

When an amount of a farm management deposit (FMD) is repaid to you, this amount is included in your assessable income in the year which it is repaid. A deduction is allowed for the amount you deposit as a FMD, not exceeding your taxable primary production income for that year. A trust distribution from a trust carrying on a business of primary production is defined as primary production income for the purposes of the FMD provisions: subdivision 393-B of Schedule 2G of the Income Tax Assessment Act 1936 (ITAA 1936) applies up to the 2009-10 year of income and Division 393 of the ITAA 1997 applies to the 2010-11 and later years of income.

In your situation, an FMD was repaid to you for an amount exceeding $250,000. As this amount is included in your assessable income, it may therefore form part of your adjusted taxable income.

However, as an FMD may only be sourced from primary production income and you have two sources of primary production income (as a partner in the partnership and beneficiary of the trust where the trustee is carrying on a primary production business) it is necessary to properly attribute the amount of FMD repayment to these sources.

Where the FMD is properly attributable to your partnership business activity (that is, it is from the partnership activity), the repayment will be excluded from your adjusted taxable income and you will satisfy the income requirement. Where the FMD is income 'from' your trust distributions, the FMD repayment will be included in your adjusted taxable income and you will not satisfy the income requirement.

For the present purposes, the amount of the repaid FMD is considered income 'from' the particular business activity from which the FMD was originally sourced. This is because there is a sufficiently proximate relationship between the assessable income and the carrying on of the primary production activity, such that it can fairly be said the assessable income is an incident of carrying on that primary production business.

During the 2007-08 financial year in which you made the FMD, your primary production partnership incurred a loss and you received a distribution, in excess of the FMD, from a trustee of a trust who was carrying on a primary production business activity. Therefore the amount of the FMD repayment cannot be considered income from your partnership business activity.

Accordingly, as the amount of the repaid FMD is not assessable income 'from' your partnership business activity, the amount is included in your adjusted taxable income and you do not satisfy the income requirement.

Special circumstances

In your situation you do not satisfy the income requirement (that is, your adjusted taxable income exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'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, including drought, flood, bushfire or some other natural disaster.

In your situation, the making and repaying of an FMD are considered events which occur in the normal course of a primary production business activity. Accordingly the Commissioner will not exercise his discretion in this instance.