Private ruling: Non-commercial losses and the Commissioner's discretion
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
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 livestock enterprise in your calculation of taxable income for the 2009-10 and 2010-11 financial years? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | 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 income years Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless: · the individual's business activity meets one of the four tests and the income requirement is also satisfied; · the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997; or · the individual comes within the Exception contained in subsection 35-10(4) of the ITAA 1997. You have not satisfied the income requirement as the relevant income exceeds $250,000 and the exception in subsection 35-10(4) of the ITAA 1997 does not apply. Losses made from the activity in this year are therefore subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides that it would be unreasonable for this to occur. The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. 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) may be exercised for the income year 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. You advise your activities have been affected by drought. However, from the information you have provided, allowing for the reduced animal numbers and the additional fodder costs, it is considered that you would still not have produced a profit. Based on the actual figures and estimates you provided, it cannot be concluded that the drought was the only reason that the activity did not make a tax profit. Rather, the loss can be attributed to the quantum of expenses such as interest, depreciation and rent expenses in relation to the possible income that could have been derived from a fully stocked property. While we accept that your activity was affected by drought, it is considered that even without the drought, you would not have made a tax profit. In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the 2009-10 and 2010-11 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: You are a partner in a partnership that operates a livestock property. | The property has a carrying capacity of X livestock. | The area has been drought declared for some time. | You reduced your stock numbers because of the drought. | You incurred an additional charge for fodder in 2010 and in 2011. | The partnership expenses for the 2009-10 financial year excluding fodder were approximately $X. | You also incurred interest expenses. | Because of the effects of the drought, you could only carry X head of cattle. However, when fully stocked, you estimate that there would be, at most, approximately Y breeders, Z one year olds and Z two year olds. | Livestock are sold as two year olds. | There were less than 50 livestock sold in 2009-10 financial year averaging approximately $Y each. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income is more than $250,000.