Edited version of private ruling

Authorisation Number: 1011865851386

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Ruling

Subject: Non-commercial losses - 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 primary production 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 operate a primary production activity which commenced in September 1997.

For the period from 1 July 2009 to 31 December 2009, the activity was operating under a partnership. The loss reported for this period is approximately $280,000 which represented your 50% share.

During the period from 1 January 2010 to 30 June 2010, you operated as a sole trader. The loss reported for this period is approximately $235,000

In March 2010, your property was damaged by a weather condition. You had harvested part of the property. However a large portion of the property was not harvested at the time of the weather condition, and was accordingly damaged by weather condition. This resulted in incurring loss of income and additional costs of approximately $250,000

In the 2009-10 financial year, you restructured and reduced staff levels which resulted in payout of leave entitlements and also redundancies.

The business has not made a tax profit in any previous year.

The restaurant is currently undergoing renovations and expansion and is expected to be completed in October 2011.

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 - Section 35-1.
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 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.

In your case, your business activity was run in the first half of the financial year as a partnership and in the second half, it was run as a sole trader. However, Division 35 states that 'the business activity must have been materially affected'. Therefore, the activity must be considered as a whole.

We accept that your activity was affected by special circumstances. However, from the information you have provided, it is clear that the activity would not have made a tax profit for the 2009-10 financial year even without the advent of the weather condition.

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.