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Ruling
Subject: non-commercial losses
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 2010-11 and 2011-12 financial years?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2011
Year ending 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You do not satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.
You carry on a primary production business primarily devoted towards edible crop growing and cattle farming.
You made a profit in the 2008-09 and 2009-10 financial years but a loss in the 2010-11 financial year.
You submit that the2010-11 financial year loss was due to a very low turnover of edible crop from the extraordinary wet seasons over the past few years in the area. Your property was affected in the following ways:
Reduced nutritional content in the bush (demonstrated by the drop in CCS levels)
Harvesting equipment cannot reach the edible crop paddocks to cut the edible crop as the ground is too wet (demonstrated by drop in actual tonnes of edible crop cut)
Inability to cut edible crop results in the crop being 'stand over'. This edible crop yields well below average nutrition content and nutrition quality.
You expect the 2011-12 financial year crop to be slightly better than 2010-11 however your current estimates are that the farm will not return to profit until the 2012-13 financial year.
Reasons for decision
For the 2009-10 and later financial 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.
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 for the 2010-11 and 2011-12 financial years.