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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 business activity in your calculation of taxable income for the 2009-10 to 2019-20 financial years?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commenced on
1 July 2009
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.
The business has been in operation for over 30 years.
The business employs a full time manager who looks after the property and attends to the operation.
You submit that the area where the property is situated has been in drought for 15 years.
The Department of Primary Industries (DPI) has revoked the drought declaration for your area.
You have submitted long term and average rainfall statistics.
You have submitted profit and loss results for the past five years.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 35-10(1)
Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Income Tax Assessment Act 1997 paragraph 35-55(1)(a)
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)
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:
o you satisfy the income requirement and you pass one of the four tests
o the exceptions apply, or
o 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.
Regardless of whether your property has been affected by special circumstances or not, you have provided insufficient evidence that your activity would have made a tax profit in the 2009-10 or 2010-11 financial years or will make profits in the future.
Your business has been running for over 30 years and you were unable to verify whether the business has ever made a profit, although you believe that in earlier years this was the case. Furthermore, the average annual rainfall for the last ten years is only marginally lower than the long term average.
In addition, you have asked for the Commissioner's discretion up to the 2019-20 which would indicate you do not expect to make a profit in the coming years even though the drought has broken.
Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for those years.