Edited version of private ruling

Authorisation Number: 1011810745453

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Ruling

Subject: non-commercial losses

Question 1

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 primary production activity in your calculation of taxable income for the 2009-10 to 2011-12 financial years?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2009-10 to 2011-12 financial years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012

Relevant facts and circumstances

You purchased a property in the relevant year and planted a number of acres of a particular crop. The remaining land is used for other farming purposes. The property is operated by you, and other staff.

The 2004-05 financial year produced a tax profit for your primary production activity.

In order to value add to crio production, activities have been extended.

Crop purchase contracts for the entire production were held until 2009 and there are ongoing purchase agreements.

A number of circumstances within the domestic and international market have impacted on your crop production operation.

Despite the downturn in the industry, the last twelve months has seen a marked improvement in sales compared to the preceding years. However it is acknowledged that there is considerable stock on hand, and that further efforts are required in marketing and sales.

You have improved your website and engaged an experienced industry business consultant to ensure you have a sound business strategy for the future

Reasons for decision

Summary

The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10, 2010-11 and 2011-12 financial years. You have not been able to show that the circumstances that have affected your business are special circumstances.

The inherent nature of a crop growing activity that precludes a tax profit from being made is that the crop takes several years from planting before they can be harvested. You commenced your crop growing activity in the relevant year with the activity producing a tax profit in the 2004-05 financial year. The fact that the activity has produced a tax profit shows that the lead time for your activity has now passed. Losses since that time are the result of factors such as market price fluctuations and an economic downturn rather than being caused by the inherent nature of the activity. Therefore, the Commissioner will not exercise the discretion available in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10, 2010-11 and 2011-12 financial years.

Detailed reasoning

Paragraph 35-55(1)(a) of the ITAA 1997

You have applied for the Commissioner's discretion - special circumstances, with regard to your losses for the 2009-10 to 2011-12 financial years, as your other income is in excess of $250,000 and you do not have access to the assessable income test, profits test, real property test or the other assets test. Also, the exception for primary producers does not apply as your other income exceeds $40,000.

Section 35-55 of the ITAA 1997 provides that the Commissioner can decide that section 35-10 of the ITAA 1997 does not apply where he is satisfied that it is unreasonable for it to apply.

Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise the discretion where certain special circumstances apply.

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity, including drought, bushfire and other natural disasters. However the list is not meant to be exhaustive. There are a range of other circumstances which may be considered as special.

Paragraph 47 of Taxation Ruling TR 2007/6 explains that to qualify as special circumstances the circumstances must go beyond the normal or expected fluctuations in business, weather or market conditions. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity as well as trading downs and risks associated with running a business will not be considered to be special circumstances.

Whilst we accept that the fluctuations in market prices, an economic downturn, excessive crop production and exchange rates are not within your control we consider them to be a normal part of the industry; it is not something unexpected.

In view of the above, the Commissioner's discretion in respect of special circumstances will not be exercised for the 2009-10 to 2011-12 financial years.

Paragraph 35-55(1)(c) of the ITAA 1997

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies the following requirements:

for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C).

The note to paragraph 35-55(1)(c) of the ITAA 1997 refers to the paragraph being intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. It provides the example of the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. 

It is accepted that a crop growing activity has a lead time before a tax profit can be achieved. This is because it is in the nature of such an activity that there will be a period of time before any income is produced. That is, the inherent nature of a crop growing activity that precludes a tax profit from being made is that vines take several years from planting before a product is produced and harvested. In your case, you commenced your growing activity in the relevant year with the activity producing a tax profit in the 2004-05 financial year. The fact that the activity has produced a tax profit shows that the lead time for your activity has now passed. Losses since that time are the result of factors such as market price fluctuations and an economic downturn rather than being caused by the inherent nature of the activity.

Therefore, the Commissioner will not exercise the discretion available in paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to 2011-12 financial years.