Private ruling: non-commercial losses
Published: March 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2001

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 for the 2010-11 financial year? | 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. A summary of the partnership profit and loss figures for the last six years is as follows: · You made a small profit in one out of the last six years. · In the 2010 your farm experienced record low rainfall. · You your income levels were higher than the previous year and your expenses significantly higher. · Significant expenses included depreciation and fees relating to the previous year but invoiced late.

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: Summary: For the 2009-10 and later financial year, 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 Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred. Taxation Ruling TR 2007/6 explains that for those individuals who do not meet the <$250,000 income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year. 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. You have stated that your business was affected by abnormal rainfall in 2010. You submit that the 2010 year had record low rainfall. Obviously the extent of the losses for these years has been contributed to by the lack of rainfall. But this is not sufficient for the Commissioner to be able to exercise the special circumstances discretion. He must be satisfied that you would have made a profit but for these effects. It would be expected that if it was only the lack of rainfall that caused your business to make a loss, then it would have made a profit in the year preceding the 2010-11 financial year where normal levels of rainfall occurred. Your income figures for the 2010-11 financial year shows an improvement on past performance. Whilst we accept that you would have incurred additional expenses in relation to the handfeeding of your livestock you have not shown that but for these additional expenses you would have produced a tax profit. The Commissioner is not satisfied that if it were not for the lack of rain your activity would have made a profit in the 2010-11 financial year. Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for those years.

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