Edited version of private ruling

Authorisation Number: 1011797287014

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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 year ended 30 June 2010?

Answers: Yes.

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the 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 2011?

Answers: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You commenced your farming business activities more than ten years ago.

Your activities are carried out on a property of approximately X000 acres.

Your farming activities include livestock and crops.

The profitability of your farming activities has been affected by drought conditions over the last decade. You have provided rainfall data from the Bureau of Meteorology confirming this.

As a result of the on going drought conditions, you were forced to de-stock and purchase grain to feed your remaining stock. In the 2009-10 financial year, your livestock fodder expenses increased.

The drought also affected your cropping program; after incurring the cost of preparing and establishing crops and pastures, they were lost or the harvest was extremely poor. In the 2009-10 financial year, your anticipated crop sales of more than $X were reduced by more than $Y.

The drought conditions have also resulted in an increase in repair and maintenance costs for plant and equipment.

Your cropping expenses were reduced as a result of lower freight and harvest costs and better than expected livestock sales helped to reduce your overall losses.

You are now installing an extensive tank and trough system to better cope with the next dry period. However, this resulted in an increase in capital expenditure in the 2009-10 financial year.

Overall, your an anticipated profit in the 2009-10 financial year has become an overall loss.

Your forecast figures for the 2010-11 financial year show an anticipated profit.

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. 

You have stated that your property has experienced many years of drought since your business commenced which has affected its profitability. You have provided rainfall data from the Bureau of Meteorology confirming the drought conditions.

These drought conditions were outside your control and, therefore, are accepted as '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.

In the 2009-10 financial year, the drought conditions resulted in the loss of some crops while others provided extremely poor yields. The drought also led to an increase in spending for repairs and maintenance of farm equipment and on capital expenditure to reduce the affects of future dry periods on the farms profitability.

Your farming activities have never made a tax profit. However, in the 2009-10 financial year, your losses were greatly reduced from previous years and, had your grain crops not failed, your activities would have produced a profit. In addition, the projections you have provided for the 2010-11 financial year indicate that your activities are expected to produce an overall profit.

The Commissioner is satisfied that your farming activities would have made a profit in the year ended 30 June 2010 had it not been affected by special circumstances. 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.

As your projections for the 2010-11 financial year anticipate a profit from your farming activities, the Commissioner is unable to exercise the discretion for this year.