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Edited version of your private ruling
Authorisation Number: 1012507404228
Ruling
Subject: Non-commercial losses-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 primary production activity in your calculation of taxable income for the 2010-11 to the 2012-13 financial years?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You are a partner in a primary production activity and your income for non-commercial loss purposes is greater than $250,000.
You bought into a primary production operation and added several more over the years to expand your holdings. These properties were also run down and all required considerable initial sums of money to be invested to improve their productivity, fertility and sustainability after decades of neglect.
Debts have accumulated through those acquisitions and financing the effects of a long term devastating drought. The drought has had a fundamental impact on property profitability.
Assets have been sold heavily over the last several years with now limited scope from those sources.
You consider that the debilitating effects of a drought and the desire to quickly implement improvements as special circumstances.
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 paragraph 35-55(1)(a)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Reasons for decision
For the 2009-10 and later financial years Division 35 of the 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 you do not satisfy the income requirement and you do not come under any of the exceptions. The relevant discretion may be exercised for the financial 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 years 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.
Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. However, it is not accepted that you have provided evidence that, but for the drought, you would have produced a tax profit for the financial years in question.
You have made a profit for two or three years in your many years of primary production. For the discretion to be exercised you must be able to show that had the special circumstances not occurred your primary production activity would have made a profit in the 2010-11 to the 2012-13 financial years. The information supplied for these years show;
· a cash flow loss in the 2011-12 financial year
· a cash flow profit but a tax loss in the 2012-13 financial year
From the information supplied and as you have produced a profit for two or three years in the years of ownership it is not possible to identify and determine that special circumstances prevented a profit in the 2010-11 to the 2012-13 financial years.
Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.