Private ruling: Non-commercial losses - Commissioner's discretion - special circumstances
Published: July 2011
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 activity in your calculation of taxable income for the 2009-10 to 2011-12 financial years? | A1: Yes.



Reasons for decision: Summary: 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, or · the Commissioner exercises his discretion. 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 income 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. It is considered that the bushfire was outside your control and therefore it is accepted as a special circumstance as this term is used in paragraph 35-55(1)(a) of the ITAA 1997. 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 years in question where, but for the special circumstances: · your 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. Your livestock farm was badly damaged by the bushfires and all of the livestock on hand just before that time were destroyed. As a consequence your assessable income from the livestock farming activity for the 2009-10 financial year was nil, compared to your livestock sales in previous years. It is reasonable to expect that, had your livestock and infrastructure not been destroyed by the bushfires, you could have achieved sales of XX head in the 2009-10 financial year (which is less that the yearly average for numbers of livestock sold in the X years preceding the fires). Therefore, it would be reasonable to accept that $XXX may be an estimate of lost livestock sales in the 2009-10 financial year. It is further accepted that you may have been able to achieve your projected sales in the 2010-11 and 2011-12 financial years. Your repairs and maintenance also increased in the 2009-10 financial year in comparison to before the fires (for example, they almost tripled from the amount claimed in the 2007-08 financial year). Your depreciation expenses have also increased significantly since the fires. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is reasonable to conclude that: · but for the special circumstances, you would have made a tax profit in the 2009-10 to 2011-12 financial years; and · you have met one of the four tests or would have but for special circumstances. The Commissioner is therefore satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your livestock farming activity and will exercise his discretion for the 2009-10 to 2011-12 financial years. This means that any loss for your activity can be taken into account in calculating your taxable income for the 2009-10 to 2011-12 financial years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | · your application for private ruling; and | · further information provided. | Your adjusted taxable income for non-commercial loss purposes is more than $250,000 in the 2009-10 financial year and you expect it to be more than $250,000 in the 2010-11 and 2011-12 financial years. | You carry on a livestock farming operation. | You screen and select livestock for rearing and finishing before final sales. | You oversee the business and you employ a part-time farmhand to assist with the general upkeep and maintenance of the property and livestock. | Independent contractors are also employed to provide assistance with weed control, hay cutting and major pasture improvements. | You have generated a loss in the 2009-10 financial year and you expect to generate losses during the 2010-11 and 2011-12 financial years, due to the severe bushfires. | Your property was badly damaged by the bushfires. All of the livestock on hand just before that time were destroyed and the vegetation, pastures, plant, equipment, sheds and fences on the property were also destroyed. | You believe that the property will require at least four years for a full recovery during which time the farm assets, plant and equipment will be fully replaced and the pastures, vegetation and soils restored. | You expect that your farming activity will show a profit in the 2012-13 financial year, based on the livestock sales expected for the next three financial years: | You have provided profit and loss statements for the business for the 2007-08 to 2009-10 financial years. | The business would have shown a profit for the 2008-09 financial year, prior to taking into consideration the Small Business Tax Break, partly due to receiving insurance proceeds. | You state that your estimated projected figures are based on both historic trends and current market information. | You have provided the following notes regarding the major changes: | (a) Gross profit from livestock sales highlights the future capacity of the farm per your projections together with costs and sale prices in line with current figures | (b) Repairs and maintenance reductions in line with an established operation which would have been the case if not for the bushfires. | (c) Depreciation reductions in line with fixed asset register prior to the bushfires allowing for minor replacements as would have been the case except for the bushfires where everything was destroyed or damaged and replaced. | (d) Contractor costs would have been less. These expenses would have been more in line with 2008. This is a similar rationale to repairs and maintenance. | You have provided the livestock trading accounts for the 2005-06 to 2009-10 financial years.