Private ruling: Non-commercial losses
Published: December 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Q1: 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 business activity in your calculation of taxable income? | A1: No.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business. The business commenced a number of years ago in partnership with another individual. You subsequently acquired the other's interest in the property and business and continued to carry on the business as a sole trader with assistance from your spouse and employed contract labour. You have gradually developed the business over a number of years. You submit that production was severely hampered due to the effects of drought. You have provided substantiation which confirms drought conditions. The business has yet to make a profit. You expect to make a profit in the next financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-10 | Income Tax Assessment Act 1997 Section 35-30 | Income Tax Assessment Act 1997 Section 35-35 | Income Tax Assessment Act 1997 Section 35-40 | Income Tax Assessment Act 1997 Section 35-45 | Income Tax Assessment Act 1997 Section 35-55

Reasons for decision: Summary: 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) of the ITAA 1997 may be exercised for the income year(s) 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. | Detailed Reasoning - Special circumstances: Taxation Ruling TR 2007/6, which provides guidelines in relation to non-commercial business losses, discusses 'special circumstances' at paragraphs 40 to 66. This ruling states that ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case by case basis. Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' as including drought, flood, bushfire or some other natural disaster. 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. Paragraph 52 of Taxation Ruling TR 2007/6 also states that the discretion can be exercised in income years after the one in which the special circumstances occurred if the effects of those special circumstances continue such that it cannot produce a tax profit in those later years. In your case, you carry on a primary production activity. You state that your activity was affected by drought in the relevant financial years. This factor is outside of your control, and it is accepted that this is a special circumstance as discussed in TR 2007/6 above. | Detailed Reasoning - Tax profit for the income year: As stated above, this discretion may be exercised where, but for the special circumstances, the business activity would have made a tax profit. You state that the drought resulted in full production being delayed by a year and perhaps two years. You believe that the enterprise would have been profitable based on the potential yield that was likely to have been achieved were it not for the special circumstances. You have highlighted the large drop in yield in recent years and you have provided information in relation to actual yields achieved in several prior years which you contend would have resulted in your activity being profitable if those yields could have continued to be achieved. In your case, you need to show that it was the special circumstances that caused you to make a loss. We do not consider that you have shown that it was the drought that caused you to make a loss in the relevant years for the following reasons: · The business has never shown a profit and the magnitude of losses in relation to income over the life of the business indicates that your business would have remained unprofitable under favourable weather conditions. · The fact that you are using actual produce yields for years within the drought period and contend that these yields would have resulted in the activity making a profit in later years, would indicate that it is possible that the activity could make a profit despite the drought conditions and that there could be other factors which prevented the activity making a profit such as the gradual development of the business. · The years from which the actual produce yields have been used to calculate the notional profits for the later years themselves made substantial losses, which brings into question the relevance of these yields in determining that profits would have been made in the later years. For these reasons, it is considered that this requirement for the exercise of the Commissioner's discretion is not satisfied, | Detailed Reasoning - The four tests: The four tests in question are contained in sections 35-30, 35-35, 35-40 and 35-45 of the ITAA 1997. The information provided with your application indicates that the activity passes the assessable income test in section 35-30 of the ITAA 1997 in each of the relevant income years. It is therefore accepted that your activity either passes at least one of the four tests, or would have passed one of the four tests but for the special circumstance discussed above. | Detailed Reasoning - Conclusion: As you have not shown that, but for the special circumstances, your activity would have made a tax profit, the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.