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Ruling

Subject: Non-commercial business 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 business activity in the calculation of your taxable income for the 2010-11 financial year?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You commenced your primary production business activity in the 2003-04 financial year, under a partnership structure.

In the 2010-11 financial year your business activity was affected by heavy rain and flooding. This meant that machinery was unable to access the crops for necessary spraying to prevent disease, mould and rotting of the crop.

As a result, the crop was affected by disease and a great deal of the crop could not be sold in that year, meaning the activity could not satisfy the assessable income test.

The activity has regularly produced income in excess of $20,000 in prior years.

Your income from other sources not related to your business activity exceeds $40,000.

Your income for non-commercial business loss purposes in the 2010-11 financial year was less than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

Reasons for decision

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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you meeting one of the four tests.

Consequently the Commissioner will exercise his discretion in the 2010-11 year of income.