Edited version of your private ruling

Authorisation Number: 1012017883891

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Ruling

Subject: Commissioner's discretion

Questions:

1. 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 business in your calculation of taxable income for the 20XX-XX and 20XX-XX financial years?

Answer: No.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your plantation activities in your calculation of taxable income for the 20XX-XX to 2027-28 financial years?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

The scheme commenced on

1 July 2009

Relevant facts

You commenced your livestock business activities in 20XX.

Your activities involve the purchase of livestock which are fattened and on-sold after approximately X days.

You would have expected to carry 60 to 75 head for the 20XX-XX and 20XX-XX financial years.

In the 20XX-XX financial year, rainfall was significantly below average. This affected your pasture growth and carrying capacity. As many farmers destocked before summer, due to the water shortages and lack of available feed, there was an over supply of stock and the prices collapsed.

In the 20XX-XX financial year, rainfall was again below average and, with the poor preceding season, conditions were exceptionally dry. You had virtually no carrying capacity and were only able to turn over 17 head during the season.

You have provided copies of drought statements for the Bureau of Meteorology for the region where your farm is situated for these periods.

Your expenses for the 20XX-XX financial year were almost $60,000.

You have provided projections for future years showing you expect your carrying capacity to reach a maximum of XX head by the 2014-15 financial year and you expect to produce a maximum gross profit of approximately $46,000 from the sale of the livestock, before expenses.

Your forestry activities commenced in 2008 with the planting of a specific species of trees, based on the objective to produce high value, furniture grade timber.

After the initial establishment costs in year one, and pruning and thinning in years two to eight, your objective is to harvest in 20 to 25 years producing net revenue of between $90,000 and $130,000, depending on growth rates and optimal harvest lot sizes at that time.

Your income for non-commercial loss purposes in the 20XX-XX and 20XX-XX financial years was above $250,000 and you expect this will be the case for the 2011-12 to 2027-28 financial years as well.

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 - Subsection 35-55(1)

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

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each of activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

Based on the facts and the overall impression, your livestock and your plantation activities are considered to be two separate business activities and Division 35 of the ITAA 1997 will be applied to each business activity separately.

Division 35

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000 in the 20XX-XX and 20XX-XX financial years and you expect this will be the case for the 2011-12 to 2027-28 financial years as well.

Livestock activities

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. 

In your case, your livestock business activity was affected by drought in the 20XX-XX and 20XX-XX financial years.

It is accepted that these conditions were outside your control and are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss.

Based on your projected figures, you expect your carrying capacity to reach a maximum of XX head by the 2014-15 financial year and you expect to produce a maximum gross profit of $46,000 from the sale of the livestock, before expenses.

Based on your actual expenses of almost $60,000, had you been able to achieve this gross profit amount your activities would still have produced an overall loss of almost $14,000.

The Commissioner is not satisfied that your activities would have made a profit in the 20XX-XX and 20XX-XX financial years even if it had not been affected by special circumstances.

Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 20XX-XX and 20XX-XX financial years.

Plantation activities

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

Your plantation activities commenced in 20XX. The trees will be harvested at between 20 and 25 years; producing net revenue of between $90,000 and $130,000, depending on growth rates and optimal harvest lot sizes at that time.

Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, your plantation activity will produce assessable income greater than the expenses attributed to it.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your plantation activities for the 20XX-XX to 2027-28 financial years.