Edited version of your private ruling

Authorisation Number: 1012543298653

Ruling

Subject: Non commercial losses and the 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 livestock farming enterprise in your calculation of taxable income for the relevant income year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2004

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling,

· email

· profit and loss statement for the relevant periods,

· link to the drought declared areas

You commenced farming in partnership in 200X.

Since then, you have made a loss in every year.

You effectively destocked in the 20XX financial year as a result of the previous drought and only had a livestock of approximately X head.

Over the 3 to 4 years, you have built the livestock up to exceed Y as at 30 June 20YY.

You ceased employment to concentrate on your animal grazing business in the 20YY financial year.

You elected to take a lump sum withdrawal from your superannuation to allow for a cash settlement on the property which they were acquiring.

As a consequence of the lump sum superannuation withdrawal you have exceeded $250,000 in income and as such do not satisfy subsection 35-10(2E) of the ITAA 1997.

Your farm was drought declared between January 200Y and March 200Z.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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 income years division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless:

· the individual's business activity meets one of the four tests and the income requirement is also satisfied;·
· the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997; or

· the individual comes within the Exception contained in subsection 35-10(4) of the ITAA 1997.

(refer subsection 35-10(1) of the ITAA 1997).

You have not satisfied the income requirement as the relevant income exceeds $250,000 and the Exception in subsection 35-10(4) of the ITAA 1997 does not apply. Losses made from the activity in this year are therefore subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable for this to occur.

The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question 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 do not satisfy the income requirement special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where:

· but for the special circumstances, the business activity would have made a tax profit; and

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

In your case, you meet the income test and the real property test.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's 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. 

While we accept that your farm was affected by drought up to 200X, you have not shown that it was the drought that has caused you to make a loss in the relevant financial year.

We acknowledge that your fodder and freight costs were higher. However, it cannot be said that these costs are directly attributable to a drought that ended in 200X. Furthermore, while the costs may be a factor adding to the loss, even without those costs, you would not have made a profit.

Receiving the superannuation payout caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' as it has not affected the business activity or caused it to make a loss.

While we appreciate your situation, there is no discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.