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Edited version of private ruling
Authorisation Number: 1011790311893
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Ruling
Subject: Commissioner's discretion
Questions:
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 the calculation of your taxable income for the 2009-10 financial year?
Answer:
No.
Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your farming enterprise in the calculation of your taxable income for the 2009-10 financial year?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You purchased a new rural property in 2008 and later transferred livestock to the property.
Based on your past performance and experience in the industry, you expect this business to become profitable within the next few years.
In the 2009-10 financial year, you received one-off income payments. As a result of these payments, your income for non-commercial loss purposes was above $250,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 35-1.
Income Tax Assessment Act 1997 - Section 35-55
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a)
Income Tax Assessment Act 1997 - Subsection 35-10(2)
Income Tax Assessment Act 1997 - Subsection 35-10(2E).
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 his 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.
Special circumstances discretion
The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 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 those which have materially affected the business activity, causing it to make a loss.
In your case, you received one off income payments in excess of $250,000. Receiving these payments did not affect your farming enterprise, causing it to make a loss. Instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.
Nature of the activity discretion
The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where the Commissioner is satisfied 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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.
In your case, you purchased a rural property in 2008 and later transferred livestock to the property. You anticipate that the business being carried out on the property will be profitable in the next few years. You have not provided any evidence from an independent source to establish the commercially viable period for your industry/business.
Taking into consideration the information you have provided, the Commissioner is satisfied that your business will produce a tax profit within the commercially viable period for your type of business.
Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 financial year.