Edited version of your written advice

Authorisation Number: 1012811112600

Ruling

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

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your partnership business activity in your calculation of taxable income for the 2013/14 financial year?

Answer

No

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 1997

Relevant facts

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

The business activity has been in operation for in excess of 15 years.

The property is leased by the business from an associated owner.

The other assets used on the property have a value of in excess of $500,000.

Problems caused by drought conditions were exacerbated by a general lack of working capital in the business.

Bureau of Meteorology monthly rainfall data indicates that there was particularly low rainfall in the relevant years.

The income of the business is from the sale of produce.

Livestock Account figures have been provided to give a history of stock levels and sales.

During recent past years, the property owner has continued to maintain the property in good condition by regular weed spraying, new fencing, additional dams and water reticulation with the objective of maintaining the property and to provide additional carrying capacity.

Based on the current business plan, it is expected that the business will derive sustainable profits within the next three to five years.

Profit and Loss Statements have been provided for the relevant years.

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 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 (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his 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 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 year(s) 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.

Application to your situation for the 2013/14 financial year

Carrying on a business

It is accepted that you are carrying on a business in this year.

Special circumstances

You have argued that the special circumstances that have affected your business are drought.

You have argued that the drought conditions have both a direct and indirect effect on the business.

The business continues to be affected by droughts and dry periods from earlier years.

You have argued that after a reduction in stock numbers due to drought, there is a period of time to be able to build stock levels back up through either breeding and replacement or purchasing. There is an increase in price of replacement stock as the weather improves due to competition and it is difficult to acquire stock. The turnaround period could be 3 years.

The information you have referenced regarding the Millennium Drought indicates that:

The 2002-2007 drought, or 'big dry', was actually two separate droughts, each of about 12 months duration, 2002-03 and 2006-07, which resulted from two separate El Nino events. Crucially, there was no significant wet period between the two events to alleviate rainfall deficiencies. Not only did the 2002 - 2007 drought significantly reduce farm production during the event but ongoing effects continued to be felt in many regions following the return of 'normal' rainfall patterns. 2010 and 2011 were extremely wet years through large parts of Australia, and drought had disappeared from the map of eastern Australia by early 2011.

The rainfall records confirm the periods of drought.

You have heavily sold down on breeder numbers during the drought which impacts on profitability and takes a period to recover.

Having regard to your full circumstances over the period of time since the 2002 year, it is accepted that your business activity has been affected by special circumstances outside your control (drought) which may have a continuing impact on business outcomes in the year ended 30 June 2014.

Prevention of profit

To be able to exercise the discretion it has to be shown that these special circumstances (drought) have prevented the business from making a profit in the year ended 30 June 2014.

The business activity has never made a profit since its commencement.

You have indicated that in the 2012/13 and 2013/14 financial years the owner of the property has charged amounts of administration costs and service charges, and interest which represents a recoupment of costs incurred over many years relating to significant improvements made to the property which will benefit cattle activities for many years in the future.

An examination of the Farm Income Profit and Loss Statement for the 2013/14 income year, does not indicate that there are any extra expenses directly related to drought. Feed and fertilizer, salaries, cartage, electricity & gas, fuel & oil, general expenses are all down on the previous year.

The evidence provided does not allow us to reach the conclusion that the ongoing effects of drought was the main reason that prevented the business activity from making a profit in the 2013/14 income year. The loss appears to have been caused by the large deductions accumulated over a period of time by the property owner in relation to improvements and interest expenses being passed on in this year and the previous year. On this basis a discretion under paragraph 35-55(1)(a) cannot be exercised.

ATO view documents

Taxation Ruling TR 2001/14
Taxation Ruling TR 2007/6