Private ruling: Non-commercial losses
Published: November 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 in your calculation of taxable income for the 2010-11 financial year? | A1: Yes.

Relevant facts and circumstances: You operate a business which generates income from the production of a certain fruit. The area in which you operate your business has been severely affected by drought for the past few years affecting water allocations. The farm's profitability has suffered as a result. The area was also hit with severe flooding in late 2010 early 2011 at the peak time for crop development for the 2011 harvest. You submit that as a result of the floods, essential machinery was unable to access the crops for the necessary spraying to reduce pests and diseases which were a by-product of all the rains. Due to the fact that spraying could not take place disease set into the crops and the fruit was not in a sellable condition. You did not meet the assessable income test in the 2010-11 financial year. You met the assessable income test in the 2009-10 and 2007-08 financial years. Your income for non-commercial loss purposes is less than $250,000.

Relevant legislative provisions: 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 Income Tax Assessment Act 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 year 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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