Edited version of private ruling

Authorisation Number: 1011802172704

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Ruling

Subject: Non-commercial losses - 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 business activity in your calculation of 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

20 March 1987

Relevant facts

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

· your application for private ruling which we received on 15 November 2010; and

· further information which we received on 4 May 2011.

You operate a number of farming properties on which you grow mixed crops and some livestock.

You do not qualify for an exception from the non-commercial loss rules as your assessable income (excluding any net capital gain) from sources not related to the activity is more than $40,000.

Your income for non-commercial loss purposes is more than $250,000.

You own large, productive rural holdings across two separate locations.

Your main farm is managed by an employed full-time manager.

You have recently invested $1 million in new farming equipment to more efficiently and intensively crop your properties.

Some of your properties are managed under a traditional 50/50 share farming agreement.

You consider the drought conditions in your district to be a special circumstance which prevented you making a profit in the 2009-10 financial year.

You have provided your actual income and expenses figures for the past ten years, showing profits were made in three of those years.

Information you have provided states that you are well positioned to benefit from the current strong seasonal outlook across the state. You have provided projections showing you expect to make a profit in the 2010-11 financial year.

Your explanatory notes to the projections refer to your projected income for 2010-11 being based on a similar yield to the previous year but an increase in grain prices of approximately 40%.

You have stated that if yields and prices had been similar to this in the 2009-10 financial year (that is, if not for the special circumstances), based on the total cost figures provided you would have made a profit.

You have provided a statement from an independently qualified source that, like all farming businesses across your region of Australia, your level of turnover and profitability has been limited in recent years by a combination of low rainfall and poor seasonal conditions, together with low commodity prices in 2009.

You have also provided independent evidence of extreme hot weather conditions, best described as an extreme unseasonal heatwave, which occurred during the critical end of the crop growing period and had a significant adverse effect on both yields and quality.

The information detailed in the report concludes that these extreme hot weather conditions were 'a one in forty year sequence of events', which you state is clearly outside your control.

Based upon the special circumstances causing a reduction in both the yield and quality on the production of crops, it is estimated that the special circumstances caused a decrease in gross turnover (net of GST).

You submit that the above evidence clearly details that the special circumstances prevented your farming operations from making a profit in the 2009-10 financial year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision

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.

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 years 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.

We are satisfied that the area of the location of your farm was affected by special circumstances. As a result you had lower yields and prices and your potential assessable income was reduced by the impact of these events in the 2009-10 financial year.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, the Commissioner is satisfied that your farming activity would have made a profit in the 2009-10 financial year had it not been affected by extreme weather events.

Consequently, the Commissioner will exercise his discretion in the 2009-10 financial year. This means that any loss for your activity can be taken into account in calculating your taxable income for that year.