Edited version of private ruling

Authorisation Number: 1011806019404

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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 share of the loss from your mixed farming partnership in the calculation of your taxable income for the 2009-10 income year?

Answer

Yes.

Note:

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the income year in question. That decision can only be made in issuing you your assessment, following lodgement of your income tax return for this income year, being that for the income year ended 30 June 2010. You can lodge this return on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2003

Relevant facts

You and another person started a partnership which operates a mixed farming business.

The property is large in size and currently runs sheep and cattle.

Your partnership has made a profit in a recent financial year.

The business has passed the assessable income test, the real property test and the other assets test in each year since the business began.

The property suffered from drought conditions during the 2009-10 financial year. Just when the drought seemed to be over the property was subjected to some flooding late in the year.

The drought forced the price you received from the sale of livestock down and forced the partnership to incur additional costs in feeding the animals and in looking after the livestock. The drought has also had a huge effect on the number of natural increase that the partnership had during the year. The partnership also incurred additional costs in purchasing chemicals, fertiliser and seed for the grain crop only to have the crops severely damaged due to the rain and floods prior to harvest.

The late flooding has caused an increase in expenditure on repairs and maintenance of plant and equipment that was damaged due to the flooding.

The partnership is in the process of building the herd of cattle and flock of sheep and anticipates that from the 2010-11 financial year and future years a profit will be made.

You do not meet the <$250,000 income requirement set out in 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 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 year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit

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

After a long period of drought you are now in the process of building up your herd of sheep and cattle and anticipate that in the 2010-11 financial year and future years you will make a trading profit. After a prolonged drought you also were subjected to flooding late in the 2010 financial year.

The drought has prevented you from making a taxable profit as it forced the price you received from the sale of the livestock down and forced you to incur additional costs in feeding and looking after the animals. The drought has also had a huge impact on the number of natural increase that you have had during the year.

You also incurred additional costs in purchasing chemicals, fertiliser and seed for the grain crop, only to have the crops severely damaged due to the rain and floods prior to the harvest. The late flooding has caused an increase in the amount of expenditure spent on repairs and maintenance on plant and equipment that was damaged due to the flooding.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that:

· but for the special circumstances, you would have made a tax profit

· you have met one of the four tests or would have but for special circumstances.

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