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

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: 

Relevant facts and circumstances: You carry on a primary production business in partnership primarily devoted towards grape growing. The grapes are produced and sold to winemakers. You are a partner in a grape growing business where grapes are produced and sold to winemakers. In the 2010-11 financial year your district experienced an unseasonal wet winter and spring. The weather adversely affected your primary production activity. You sprayed the vineyard with fungicides and mould inhibitors until it was apparent that no amount of spraying was going to save the vines as they were suffering severely from downy mildew and powdery mildew caused by the wet weather and would not set any crop. Access to the vineyard was also restricted as a result of the weather so that you would have been unable to spray the vineyard had the crop set. As the remainder of the financial year progressed continuous heavy rain and flooding prevented any likelihood of a crop. You submit that you have no reason to believe that had it not been for the unseasonal and continuous wet weather that you would have been able to make $20,000 in assessable income based on expected prices and average yields.

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 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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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. For individuals who satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you meeting one of the four tests. Consequently the Commissioner will exercise his discretion in the 2010-11 financial year.

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