Edited version of private ruling

Authorisation Number: 1011814267805

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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

You commenced the farm operation in 1999.

The farm operates as a cropping and livestock business.

The farming district had been in drought for the period May 2003 to the March 2011. As a consequence of the continuous droughts you took the following steps:

(a) Reduced livestock numbers to ensure carrying capacity, feed and water availability

(b) Reduced cropping area with part of the area sown with lucerne to ensure that there would be enough feed.

The farm operated at a tax loss in the 2009-10 financial year.

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

Had the stocking level been kept at pre drought levels the extra livestock production would have generated sales of another 600 animals with proceeds of nearly $70,000.

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

You have provided information about carrying capacities, budgets and livestock trading accounts. You have also provided independent evidence about expected yields and prices.

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 - 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 years 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.