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Ruling

Subject: Non-commercial losses-Commissioner's discretion - special circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include your share of losses from the partnership fruit growing 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 2005

Relevant facts

You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You grow fruit under irrigation.

Due to continuing severe drought your water allocation has been severely restricted for a number of years, including the 2010-11 income year.

You estimate that you have lost up to 7-10% of your plantings as a result of numerous years of water restrictions.

You have provided a letter from the buyer stating that you received less money per tonne in the 2010-11 year due to exposed fruit being sunburnt as a result of the light canopy. The light canopy was a direct result caused by insufficient water being applied.

You still have young plants that are not yet producing fruit for harvesting. These had to be planted to replace plants that died because they did not cope with the water restrictions.

You passed the assessable income test in the income year before the water restrictions were imposed.

You have also provided figures for the 2011-12 season showing that you pass the assessable income test. Water restrictions were not in place during the 2011-12 season.

Before you became the owner of the business, the turnover was in excess of $60,000.

You have not satisfied any of the four tests set out under Division 35 of the ITAA 1997 in the 2010-11 year. The exception under subsection 35-10(4) of the ITAA 1997 does not apply.

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)

Reasons for decision

For the 2009-10 and later financial years, Division 35 of ITAA 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.

In your case the circumstances which occurred in the 2010-11 income year are considered to be outside your control. The allocation of water is strictly controlled by the state government.

You have stated that your primary production business losses for the 2010-11 financial year have been due to water restrictions. In previous years you have shown that water restrictions have contributed significantly to your loss of income. However this is not sufficient for the Commissioner to be able to exercise the special circumstances discretion for the 2010-11 financial year. He must be satisfied that you would have passed one of the four tests, in your case the assessable income test, in the 2010-11 financial year but for the special circumstances.

You passed the assessable income test in the financial year before the water restrictions were imposed. You have also provided figures for the 2011-12 season, when you had a full water allocation, showing that you passed the assessable income test.

In the 2010-11 financial year you were affected by the lack of water. The effect on your crop was threefold: the yield from the plants were down, replacement plants were still not yielding and your price was marked down due to sunburn from lack of canopy. Total production was reduced. You had a mark down in price due to sunburn from lack of foliage cover. You estimate that you had lost 7-10% of your plants and the replacements have not started producing fruit yet.

If an estimate was calculated on the basis of the 2011-12 yield with an allowance of 7% for missing plants and the average prices received for the varieties in your region in the 2010-11 year to allow for the reduction due to sunburn, you would have passed the assessable income test.

The Commissioner is satisfied that if it were not for the water restrictions, their long term impact and the reduction in price due to sunburn, your activity would have passed the assessable income test in the 2010-11 financial year. Consequently, the Commissioner's discretion in respect of special circumstances will be exercised for that year.