Edited version of private ruling

Authorisation Number: 1011813731328

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Ruling

Subject: Non-commercial losses and the 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 livestock and grain growing activity in the calculation of your taxable income for the 2009-10 and 2010-11 financial years?

Answer

Yes.

This ruling applies for the following periods

Years ended 30 June 2010

Years ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

Your parent transferred a farm to you as part of a succession plan.

You commenced the farm operation in 200X.

The farm operates as a cropping and livestock business.

The farm operated at a tax loss of nearly $XX,000 in the 2009-10 financial year.

You have provided evidence from a consultant that states that if not for the drought conditions, you would have expected to have derived more than $65,000 gross income from your crop activities in the 2009-10 financial year.

You estimate that you would have derived an additional amount from crops in the 2009-10 financial year if not for the effects of the drought.

You also state that the drought has prevented you from fully stocking breeding livestock which means in turn that you have had progeny for sale.

Your gross profit from livestock trading in the 2009-10 financial year was less than $20,000 and you have provided evidence that you sold livestock in the recent year for more than $20,000..

Your area was drought declared for several years to the recent year..

You expect to make a tax profit in the 2011-12 financial year.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year and will be more than $250,000 in the 2010-11 financial year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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.

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 and 2010-11 financial years.