Edited version of private ruling

Authorisation Number: 1011909705009

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Ruling

Subject: Non-Commercial Losses Special Circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) (special circumstances) to allow you to include any losses from your fruit growing business in the calculation of your taxable income for the 2010-11 financial year?

Advice/Answers

Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You have operated a fruit growing business for many years.

The fruit is grown on two properties which have a combined area of XX acres under crop.

The 2010-11 season started with very heavy and late winter and spring rains which filled the water table for the first time in many years. The rains however continued to fall into summer and culminated in 100mm falling in 24 hours in December 2010. Along with these flooding rains the temperatures were cooler than normal in November and December 2010 and the resulting large canopies resulted in a high level of disease.

Although there were cool nights and days reaching low 30 degrees centigrade you also experienced a week in excess of 37 degrees centigrade with two days reaching 42 degrees centigrade. These conditions caused any surviving fruit to collapse into an unrecoverable condition.

As a result of the flooding, disease and excess temperatures over 90% of your expected crop was lost.

As a result of the above circumstances you were forced to sell personal assets to fund your farming business which has been left with a full year's costs but negligible income. Two properties which were held by you for over many years were forcibly sold during the year and as a result, the capital gains made on those sales meant you did not pass the non commercial loss income test in the 2010-11 financial year.

Your main customers advised that they could not take the fruit due to the high level of disease and the subsequent poor quality.

You have projected that you would have made a taxable profit but for the special circumstances.

Assumptions

None

Relevant legislative provisions

Paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997

Reasons for decision

Detailed reasoning

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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.

Your fruit crop was subjected to heavy rain causing flooding and unusually cool weather which resulted in diseases which decimated your crop. The amount of remaining crop was further reduced as a result of a week of unusually high temperatures. You have also provided a projected profit and loss statement for the situation where the special circumstances did not occur and you project you would have made a taxable profit.

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 2010-11 financial year.