Private ruling: Commissioner's discretion
Published: July 2011
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production business in your calculation of taxable income for the 2009-10 to 2013-14 financial years? | A1: Yes.


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 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a). | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2009-10 and 2010-11 financial years and you expect this will be the case in the 2011-12 to 2013-14 financial years as well. | Detailed Reasoning - Special circumstances (first limb): The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the financial year 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 generally those which have materially affected the business activity, causing it to make a loss. Special circumstances can include things like droughts and floods (Taxation Ruling TR 2007/6). | Detailed Reasoning - Nature of the activity (second limb): The Commissioner's discretion in paragraph 35-55(1)(c) may be exercised for the financial year where there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. | Detailed Reasoning - Interaction between the limbs: As stated above, ordinarily the operation of the first limb is confined to those situations in which the business activity has been affected by special circumstances outside the control of the operators of that activity where, had these circumstances not existed; the activity would have made a tax profit. However, the first limb may also apply to a business activity affected by such circumstances during a time when 'because of its nature' it is not able to produce a tax profit, but this time is still 'within [the] period that is commercially viable for the industry concerned'. In such a case, the enquiry is not whether the activity would have produced a tax profit had the special circumstances not existed (paragraph 35 55(1)(c) already recognises that there are reasons outside the control of the operators of the activity why this would not have occurred, regardless of the existence of the special circumstances). In such cases the appropriate enquiry will be whether or not the special circumstances have meant that there is no longer an objective expectation that within the period that is commercially viable for the industry concerned the activity will produce a tax profit. Where the special circumstances are the sole reason why the activity can no longer objectively be expected to produce a tax profit within the period that is commercially viable for the industry concerned, but the activity is now expected to consistently produce a profit at some later time, the discretion may be exercised. In your case, you commenced your business activities in 20XX. You have provided independent evidence that the commercially viable period for this type of activity is generally five years. However, your business activity was also affected by drought during the 2008-09 and 2009-10 financial years. Drought conditions are considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. The drought conditions meant that you were unable to grow your herd at the required rate to become commercially viable within five years. Due to restricted access to water you were unable carryout plans to expand your herd and your property until 2010 and, as a result, under your current structure you do not expect to produce a tax profit from your cattle breeding activities until the 2014-15 financial year. The inability of your business activity to produce a tax profit within a commercially viable period for your industry was due to special circumstances, as set out in paragraph 35-55(1)(a) of the ITAA 1997. Your activities are now expected to become commercially viable in the 2014-15 financial year or seven years after you commenced. Therefore, the Commissioner will exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your livestock breeding activities against your other assessable income for purposes of calculating your taxable income for the 2009-10 to 2013-14 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. | Your main business activity is livestock production. | Your plan is to build a breeding herd of XXXX by the 2013-14 financial year by keeping all females and, therefore, foregoing approximately 50% of potential revenue. | When you commenced your breeding herd was less than XXX. | A government agricultural website shows the region were your property is situated was drought declared for extended periods during the 2008-09 and 2009-10 financial years. | You received no water allocations in the 2008-09 financial year from the state's water authority which restricted your plans for the expansion of your herd. | In early 2010, as conditions improved, you spent approximately $XXX,XXX on addition livestock and began building the herd, along with natural increase, by keeping nearly all the females bred on the property. | You have provided Independent evidence which states that the standard commercially viable period for your industry is five years. | You have reduced some of your production costs, by approximately $XXX,XXX, between the 2008-09 and 2010-11 financial years in order to become commercially viable. | Production costs are expected to reduce by approximately $40,000 per annum thereafter until the 2014-15 financial year, when the business is expected to produce a profit. | Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $XXX,XXX and you expect this will be the case for the 2011-12 to 2013-14 financial years as well.