Edited version of private ruling

Authorisation Number: 1011813435821

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Ruling

Subject: Non-commercial losses and the Commissioner's discretion

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your crop growing activity in the calculation of your taxable income for the 2009-10 financial year?

Answer

No.

Question

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 crop growing activity in your calculation of taxable income for the 2009-10 financial year?

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 business in 200X growing grain crops.

Your income in the 2008-09 financial year from the activity was more than $20,000.

Your income in the 2009-10 financial year from the activity was approximately $2,000.

Your land is affected by weeds and poor soil.

You were unable to harvest the crops planted in the 2009-10 financial year until early in the next financial year because of the lack of rain at the right time.

You satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was not more than $250,000 in the 2009-10 financial year.

You do not satisfy any of the four tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 section 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 meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you satisfy the income requirement. However, you do not satisfy any of the four tests and the exceptions do not apply to you as your income from other sources is greater than $40,000. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

Lead time

The Commissioner's discretion in paragraph 35-55(1)(b) may be exercised for the financial year where, because of its nature, the business has not satisfied, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 and there is an objective expectation, based on evidence from independent sources, that your business activity will either meet one of the tests or will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity does not satisfy one of the tests or is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

In your case, you were able to satisfy the assessable income test in the 2008-09 financial year which was within the commercially viable period for your industry.

Therefore, this discretion in paragraph 35-55(1)(b) of the ITAA 1997 is no longer available to you.

Special circumstances

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 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 any of the four tests, special circumstances are generally those which have materially affected the business activity, causing the failure to satisfy any of the tests. Special circumstances can include things like droughts and floods (Taxation Ruling TR 2007/6).

In your case, you were not in a drought declared area. Rather, your area received rain at a time which meant that planting was delayed and harvest did not take place until the next financial year. Additionally, your land was affected by weeds and poor soil.

While we accept that these circumstances have effected your ability to satisfy one of the tests, none is considered to be special circumstances as envisaged by paragraph 35-55(1)(a).

As it is not considered that your business activity was affected by special circumstances the Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 financial year.

Consequently your loss from the crop growing activity must be deferred in the 2009-2010 financial year.