Edited version of private ruling

Authorisation Number: 1011809081539

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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 a share of losses from your mixed farming business in the calculation of your taxable income for the 2009-10 financial year?

Advice/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 a mixed farming business in 2006.

You live on the property with your family.

You do not employ any staff directly.

You made a loss from the mixed farming business in the 2009-10 financial year.

Your income for non-commercial loss purposes exceeded $250,000 for the 2009-10 financial year.

Information obtained from the Department of Primary Industries of NSW indicates that the area you farm in had been in drought.

Your contentions

You believe the losses incurred resulted from a number of circumstances outside of your control as follows:

Drought conditions encountered during the year at vital times meaning a 50% reduction in budgeted yield of the crop;

Pasture growth was unable to support your grazing enterprise consistent with the business plan due to the extremely irregular rainfall pattern encountered during the year;

Opportunities to double crop were not available since rainfall was insufficient to build up subsoil moisture reserves.

Livestock production was significantly affected as pastures shut down and the normal spring flush impacted. Conservative stocking rates were used to ensure the herd was carried through the poor season, well below what would be carried in a normal season.

As a result of spending a large amount on irrigation you claimed a large deduction for depreciation in the 2009-10 financial year; and

You also invested additional money on farm equipment and therefore your usual depreciation was higher due to the small business tax break in the 2009-10 financial year.

Relevant legislative provisions

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

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

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

Reasons for decision

Special circumstances

For the 2009-10 and later 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.

You must be able to demonstrate that a tax profit would have been made but for the special circumstances.

You believe the reasons for that loss were as follows:

· Drought conditions encountered during the year at vital times meaning a reduction in budgeted yield of the crop;

· Pasture growth was unable to support your grazing enterprise consistent with the business plan due to the extremely irregular rainfall pattern encountered during the year;

· Opportunities to double crop were not available since rainfall was insufficient to build up subsoil moisture reserves.

· Livestock production was significantly affected as pastures shut down and the normal spring flush impacted. Conservative stocking rates were used to ensure the herd was carried through the poor season, well below what would be carried in a normal season;

You claimed a high deduction for irrigation equipment in the 2009-10 financial year; and

You claimed the small business tax break by investing in farm equipment in the 2009-10 financial year.

It is accepted that special circumstances (the drought) affected your taxable income during the 2009-10 financial year however, it has not been demonstrated that it prevented you from making a taxable profit in that year.

It is accepted that a loss was sustained as a result of the drought in relation to a reduced crop and a reduced grazing enterprise however, despite these factors you still would not have made a taxable profit.

It is not accepted that even if double cropping had been undertaken in the 2009-10 financial year you would have made a taxable profit.

As stated previously it must be demonstrated that a taxable profit would have been made had it not been for the special circumstances. The small business tax break and depreciation on the irrigation system must be taken into account when working out your taxable income and therefore will have an impact on your taxable profit.

As it has not been clearly demonstrated that the special circumstances prevented you from making a taxable profit in the 2009-10 financial year, the Commissioner will not exercise his discretion in the 2009-10 financial year and therefore the losses must be deferred.