Edited version of private ruling

Authorisation Number: 1011835478351

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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 grain growing and livestock activity in your calculation of taxable income for the 2009-10 to 2010-11 financial years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You and your partner operate a primary production activity.

You purchased your current property during 20XX.

Since you purchased the property, you have continuously improved it with repairs to fencing, yards, water supplies, buildings and pasture improvements and soil quality.

During 20XX, you purchased new plant and equipment.

Because of the costs involved in acquiring the properties and making improvements, you have never produced a tax profit.

During 20XX you purchased a nearby portion of a property and leased a further portion with the option to purchase this portion.

Drought was declared during 2005.

Your total loss relating to the activity exceeded the amount of loss which is attributed to the drought for the 2007-08, 2008-09, 2009-10 and 2010-11 financial years.

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.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 - Subsection 35-55

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.

While you have shown that the drought and floods have impacted your activity, the activity has never produced a tax profit and you have been unable to show that, but for the drought and flood, you would have made a tax profit in the 2009-10 and 2010-11 financial years.

It follows the Commissioner cannot exercise the discretion for special circumstances as it was not these special circumstances that prevented your activity from making a tax profit. Therefore, you must defer the loss to a future year where the loss can be claimed against a profit from your business activity.