Edited version of private ruling

Authorisation Number: 1011793713484

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Ruling

Subject: Commissioner's discretion

Question

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 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

You commenced your farming business activities several years ago.

Your property, in excess of 3,000 acres, has been affected by drought throughout the ownership period.

The drought conditions meant that it was necessary for you to destock, reducing the number of livestock sales available and the yields from some crops were 25% of the long term averages while others failed completely.

Farming income in the 2009-10 financial year was approximately $X, compared to almost $Y in the 2007-08 financial year.

The drought conditions meant that some expenses where able to be reduced to a limited extent. Operating expenses, such as fuel costs, repairs and maintenance and salary and wages were all reduced.

Some expenses did increase, with larger areas of the farm being sown (although crops failed) and increased water rates, as Government subsidies ceased.

Farming expenses in the 2009-10 financial year were approximately $XX, compared to almost $YY in the 2007-08 financial year.

Assuming you have average seasonal conditions, full water allocations, average commodity prices and minimal crop destruction, you project that your business should be profitable by 2011-12 financial year.

Your income for non-commercial loss purposes in the 2009-10 income year was above $250,000.

Relevant legislative provisions

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(2E)

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.

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 those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. 

In your case, your farming activities were affected by prolonged drought conditions. These circumstances 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. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss.

You have stated that the drought conditions meant that it was necessary for you to destock your properties, reducing the number of livestock sales available and the yields from some crops were 25% of the long term averages while others failed completely. The drought conditions also meant that some operating expenses, such as fuel costs, repairs and maintenance and salary and wages, were able to be reduced to a limited extent. Some expenses did increase, with larger areas of the farm being sown (although crops failed) and increased water rates, as Government subsidies ceased. However, taking all these things into account, it is not clear that your farming activities would have produced a profit had it not been for the special circumstances. There is no evidence that, even without the effects of adverse weather conditions, the properties would be able to produce the level of income required to cover the expenses incurred to operate them. Your farming activities have never produced a tax profit.

The Commissioner is not satisfied that your farming activities would have made a profit in the year ended 30 June 2010 had it not been affected by drought. Therefore, the Commissioner is unable to 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.