Edited version of private ruling

Authorisation Number: 1011786977269

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Ruling

Subject: Commissioner's discretion

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 farming enterprise in your calculation of taxable income for the 2009-10 financial year?

Answers: Yes.

2. 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 your calculation of taxable income for the 2010-11 to 2015-16 financial years?

Answers: 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 purchased your farming property in the relevant financial year. The property was not purchased as a going concern.

Initially, some of your stock was affected by disease and had to be destroyed.

The property was later affected by drought.

These drought conditions impacted the breeding cycle of your stock and meant they had to be hand fed over the winter period and as a result were in relatively poor condition at joining time.

Pregnancy testing confirmed that a large portion were dry, and subsequently culled, which will impact the 2011-12 production.

Since purchasing the property, you have undertaken many water and pasture improvement programs as well as the construction of yards and sheds on the property

Your plan for the business is to establish a livestock production enterprise with a tax profit now expected to be achieved in the 2016-17 financial year.

You have provided independent evidence from a Government body that states that a realistic time frame to reach full production in your industry is generally five to seven years

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this to be the case for the 2010-11 to 2015-16 financial years as well.

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)(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 the 2009-10 financial year and you expect this will be the case in the 2010-11 to 2015-16 financial years as well.

Special circumstances (first limb)

The Commissioner's discretion in paragraph 35-55(1)(a) 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.

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 generally those which have materially affected the business activity, causing it to make a loss. Special circumstances can include things like droughts and floods as well as pests and disease (Taxation Ruling TR 2007/6).

Nature of the activity (second limb)

The Commissioner's discretion in paragraph 35-55(1)(c) may be exercised for the financial year where 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.

Interaction between the limbs

As stated above, ordinarily the operation of the first limb is confined to those situations in which the business activity has been affected by special circumstances outside the control of the operators of that activity where, had these circumstances not existed; the activity would have made a tax profit.

However, the first limb may also apply to a business activity affected by such circumstances during a time when 'because of its nature' it is not able to produce a tax profit, but this time is still 'within [the] period that is commercially viable for the industry concerned'. In such a case, the enquiry is not whether the activity would have produced a tax profit had the special circumstances not existed (paragraphs 35 55(1)(b) and (c) already recognise that there are reasons outside the control of the operators of the activity why this would not have occurred, regardless of the existence of the special circumstances).

In such cases the appropriate enquiry will be whether or not the special circumstances have meant that there is no longer an objective expectation that within the period that is commercially viable for the industry concerned the activity will produce a tax profit.

Where the special circumstances are the sole reason why the activity can no longer objectively be expected to produce a tax profit within the period that is commercially viable for the industry concerned, but the activity is now expected to consistently produce a profit at some later time, the discretion may be exercised.

In your case, you have provided independent evidence which suggests the commercially viable period for your industry is five to seven years. You have also provided projected profit and loss statements that show you do not expect to produce a tax profit until the 2016-17 financial year, or eight years after you commenced your business activities.

You have stated that your business activities were affected by drought and disease. These circumstances resulted in reduced stock fertility rates and, in the case of disease, the disposal of some of your stock. As a result, the expected time frame to reach full cattle production has been delayed.

These circumstances, in the form of drought and disease, were outside your control and, therefore, are accepted as a 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. These special circumstances are the sole reason why your activities will not produce a tax profit within five to seven years, or within the period that is commercially viable for your industry, but is now expected to produce a tax profit within eight years.

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 and in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2010-11 to 2015-16 financial years.