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Ruling

Subject: 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 farming business activity in your calculation of taxable income for the 2009-10 and 2010-11 financial years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced in

1 July 2009

Relevant facts

You commenced your farming business in the 2006-07 financial year.

In the 2009-10 financial year, your only debtor declared bankruptcy owing you approximately $xx,000 for the sale of produce in the 2009-10 financial year.

In the 2009-10 financial year, you had no other business income from the activity and closing stock of less than $x,000. Your total expenses, and overall loss, from the business activity was almost $xx,000.

In the 2010-11 financial year, you had no business income from the activity and closing stock of less than $x,x00. Your total expenses, and overall loss, from the business activity was around $xx,000.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $xx,000 but below $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

Income Tax Assessment Act 1997 - Section 35-30

Income Tax Assessment Act 1997 - Section 35-35

Income Tax Assessment Act 1997 - Section 35-40

Income Tax Assessment Act 1997 - Section 35-45

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

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

· the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your business is a primary production activity, however, your income from other sources is more than $40,000. Therefore, the exception contained in subsection 35-10(4) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore, you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2009-10 and 2010-11 financial years. 

Commissioner's discretion

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 satisfy the income requirement, special circumstances are those which have materially affected the business activity, preventing it from meeting one of the four non-commercial loss tests or producing a tax profit.

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. 

Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

You have stated that your business activity was affected when your only debtor declared bankruptcy owing you approximately $xx,000 for the sale of produce in the 2009-10 financial year.

It is accepted that these conditions were outside your control and would be considered '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 prevented your business activity from meeting one of the four non-commercial loss tests or producing a tax profit.

In the 2009-10 financial year, your business activity incurred almost $xx,000 in expenses. Based on this, even if you had received the proceeds of the sale of the produce, your activity would not have meet any of the four non-commercial loss tests and would still have incurred a loss of around $xx,000 in the 2009-10 financial year.

There is no evidence that the special circumstances prevented your business activity from meeting one of the four non-commercial loss tests or producing a tax profit in the 2009-10 or 2010-11 financial years.

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 in relation to your activities for the 2009-10 and 2010-11 financial years.