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Ruling

Subject: non commercial losses

Question

Will the Commissioner exercise the discretion in paragraphs 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) (special circumstances) to allow you to include losses from your business activity in your calculation of taxable income for the 2009-10 financial year?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and another entity purchased a number of young animals and intended to sell them in a short period of time.

Half of the animals were sold on the first attempt, 1 animal was sold at a second attempt a few weeks later and 2 didn't sell for many months.

A majority of the animals were sold in the 2008-09 financial year for a profit and the remaining animals were sold in the 2009-10 financial year for a loss.

It was your intention to conduct the activity of buying and selling a small number of animals and follow it up with other occurrences when market conditions were conducive. If the market was not buoyant you would not undertake the individual activities.

It is your belief that in normal circumstances the success of the activity has a sound foundation as you and the other entity both have extensive knowledge in this industry.

It is your opinion that the Global Financial Crisis (GFC) and other factors in relation to individual animals, that overall losses were unexpectedly high.

It was estimated that returns of over 50% could be obtained having regard to market conditions at the time if the right animals could be bought at the right price as the other entity had conducted similar success in the past.

Your income for non commercial loss purposes was greater than $250,000 in the 2009-10 financial year.

Relevant legislative provisions

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

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

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

Reasons for decision

Special circumstances

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: see Taxation Rulings TR 2001/14 and TR 2007/6.

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.

It is considered that this activity occurs in a reasonably volatile market. The fact that you estimated that you would receive returns of 50% and 25% (as stated by an expert in his email) indicates that high profits can be made in the market however, where large returns are a possibility, large losses are also possible. This appears to be in the general nature of the activity.

It is not considered that the GFC prevented profits from being made. This is evidenced from the sale of animal 2 and animal 3 where reasonable profits were made (and a small loss was made on animal 4). These animals were sold during the worst part of the GFC and profits were still made. The market generally started to pick up around March 2009. The losses on the sale of animal 5 and animal 6 cannot be attributed to the GFC.

Therefore it is not accepted that your business activity was affected by special circumstances outside your control.

The Commissioner will not exercise his discretion in the 2009-10 financial year, consequently losses made by the partnership must be deferred.