Edited version of private ruling

Authorisation Number: 1011795423203

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Ruling

Subject: Non Commercial Losses - Special Circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include your loss from your mixed farming business 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 have been running a primary production business on a property for several years.

The area has been in drought for the last 10 years.

The drought has now broken.

You have provided income and expense figures for the 2010-11 financial year (actual for the first eight months and projected the next four months) that show you will make a tax profit.

You passed the assessable income test in the 2009-10 financial year.

You do not satisfy the <$250,000 income requirement under subsection 35-10(2E) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2)

Income Tax Assessment Act 1997 Paragraph 35-55(1)(a)

Reasons for decision

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you 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.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit; and

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that you passed one of the four tests (assessable income test). It is also accepted that you would have made a tax profit in the 2009-10 financial year had the special circumstances not occurred. This is because the drought broke in the 2010-11 financial year and you have provided income and expense figures for this year (actual for the first eight months and projected the next four months) that show you will make a tax profit which indicates it has been the drought that has prevented your business from returning a tax profit.

Consequently the Commissioner will exercise his discretion in the 2009-10 financial year.