Edited version of your private ruling

Authorisation Number: 1012568833332

Ruling

Subject: Non-commercial losses and the Commissioner's discretion

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) or paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your livestock activity in the calculation of your taxable income for the relevant financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 June 200X

Relevant facts

You purchased the first half of the property on which you conduct a livestock activity in month 200X and the second half of the property in 20XX.

No maintenance had been conducted on the first property in more than 25 years.

The second property last had pasture improvement exercised over 50 years ago.

You undertook a five year plan to bring the properties to a standard for premium livestock grazing. A great deal of money has been invested in the improvements to the properties.

You expect to make a profit in the 20YY financial year.

The amount you received per kilogram for the livestock sold has decreased in the relevant years but has risen to the 200Y amount in 20ZZ.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2010-11 to 2012-13 financial years.

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 - Subsection 35-55(1)

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

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 unless:

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· 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 do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

Commercially viable period

The relevant discretion may be exercised for the income year in question where:

· it is in the nature of your business activity that there will be a period before a tax profit can be produced

· there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.

In your case, you have had a livestock business since 200X when you purchased the first property on which you graze livestock and the second property since 20XX.

The nature of your activity has continued to be livestock grazing. While the activity increased in size with the purchase of the second property, it is considered that the activity commenced in the 200X financial year.

Therefore, the Commissioner can not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business for the relevant financial years as the commercially viable period has expired.

Special circumstances

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 you have invested a great deal of money to bring the properties to a standard for premium livestock grazing, this was out of your control and is not considered to be a special circumstance that has affected the business activity.

We also acknowledge that the price of the livestock sold has not risen. Market fluctuations are not considered to be special circumstances as described above. However, even if this was considered to be a special circumstance, it could not be said that this was the reason for the activity not producing a profit. Rather, the expenses of improving the property were sufficient to cause the activity to make a loss.

In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the relevant financial years.