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Edited version of private ruling
Authorisation Number: 1011787620487
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Ruling
Subject: Non-commercial losses and the 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 his discretion under section 35-55 of the ITAA 1997 to allow you to include your loss from your primary production activity in calculating your taxable income for the years ended 30 June 2010 and 30 June 2011?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commenced on
1 July 2009
Relevant facts and circumstances
You operate a primary production activity.
Your activity incurred a loss in the 2009-10 financial year and you expect a loss to be incurred in the 2010-11 financial year.
In the 2009-10 financial year you received a payment in excess of $250,000 from another entity which is considered income in your hands. You will receive a similar payment in the 2010-11 financial year. This is the last year you will receive the payment. The payment is not related to your primary production activities.
Due to the payment in each year, your taxable income for non-commercial loss purposes will exceed $250,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 35-10(2E) and
Income Tax Assessment Act 1997 Section 35-55.
Reasons for decision
Summary
You do not satisfy the income requirement as the assessable payment from another entity is included in calculating your adjusted taxable income for non-commercial loss purposes.
The Commissioner's discretion has not been exercised to allow you to offset the losses from your primary production activity against your other income as failing the income requirement due to an assessable payment from another entity is not considered to be a special circumstance which affected your business activity.
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).
In your situation, you receive an assessable payment from another entity which is unrelated to your primary production activity. This payment is not considered to be assessable income from your primary production activity.
Accordingly, as the amount of the assessable payment is not assessable income 'from' your primary production 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 receipt of the payment is not considered a special circumstance. Accordingly, the Commissioner will not exercise his discretion in this instance.