Edited version of private advice

Authorisation Number: 1012661314096

Ruling

Subject: Non-commercial losses

Question 1

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 the calculation of your taxable income for the 2007-08 to 2013-14 financial years?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your primary production activity in the calculation of your taxable income for the 2013-14 to 2015-16 financial years?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2008

Year ended 30 June 2009

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 ending 30 June 2015

Year ending 30 June 2016

The scheme commenced on

1 July 2007

Relevant facts and circumstances

You meet the requirement of subsection 35-10(2E) of the ITAA 1997.

Property 1

Your property was only partly irrigated as the cost would be enormous and sinking a bore would be unaffordable however it now is fully irrigated.

Your previous private ruling considered the commercially viable period (CVP) to be five years with an additional three years allowed for the drought conditions. The Commissioner exercised the lead time discretion for eight years as you projected the assessable income test would be passed in the 2007-08 financial year however the test was not passed.

In the 2008-09 financial the primary production suffered production problems and there was no production in the 2012-13 and the 2013-14 financial years for the same reason.

Property 2

You purchased property early in the relevant year and you expect to pass the assessable income test in the 2015-16 financial year.

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)(b)

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision

Property 1

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 satisfy the income requirement and you pass one of the four tests

• the exceptions apply

• the Commissioner exercises the discretion.

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 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 financial years in question where, but for the special circumstances the activity would have passed at least one of the tests.

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. 

The special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a test not to be passed.

The previous private ruling the Commissioner considered the lead time to be five years and added three years for the drought conditions and exercised the lead time discretion to the 2006-07 financial year. You expected to pass the assessable income test in the 2007-08 financial year which you did not.

The production problems appeared in 200X which is outside the commercially viable period of eight years therefore the reason for the failure of the 200X harvest must be considered. If the failure was due to lack of water then your business choice of not seeking other water sources due to the cost was the cause of the failure.

From the evidence provided we believe that the special circumstances were not evident in the lead time period as the production problems appeared nine years after the commencement of the activity and after the lead time expired. It is considered that the failure of the 200X harvest was caused by your business choice not access local water titles or sink a bore as it would be unaffordable.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 from the 200X financial year.

Garibaldi

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:

• you satisfy the income requirement and you pass one of the four tests

• the exceptions apply

• the Commissioner exercises the discretion.

In your circumstances you will pass the assessable income test in the 2016-17 financial year. Consequently the Commissioner will exercise the discretion to allow you to include any losses from your primary production business in the calculation of your taxable income for the 2013-14 to the 2015-16 financial years.