Private ruling: Non-commercial losses - Commissioner's discretion
Published: July 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

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 farming activity in your calculation of taxable income for the year ended 30 June 200Z? | A1: Yes

Relevant facts and circumstances: You have not satisfied the income requirement as your relevant income has exceeded $250,000. You purchased a property which is being run as a crop growing enterprise along with stock grazing. It was planned that it would take approximately X years to achieve a profit. A drought in the initial years of ownership lead to smaller harvest and decreased stocking rates and did not provide cash flow to pay down debts as anticipated. In the 200X financial year you made good returns which would have resulted in a profit except for the tax break deduction for investment in machinery. In the 200X and 200Y year the crops were looking extremely good until an extended period of extremely wet weather when the crops were ready for harvest caused severe loss of quality of the crop as well as quantity. If it hadn't been for these extreme circumstances of nature, a profit would have been achieved in 200Y. Due to the weather damaged crops, loss of quality and quantity resulted in an operating loss. The crops produced half the expected income and a resultant loss. Part of the land was sold to reduce the debt burden of the property with minimal impact on the productive capacity of the business. The harvest returns were severely impacted by rain during the 200Z financial year that resulted in crop quality being downgraded resulting in X% drop in the value of the crop. It is projected that the business will record a profit in the relevant financial year. You have enclosed evidence of the severe climate events.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subparagraph 35-55(1)(a)

Reasons for decision: Summary: For the 2009-10 and later income years, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless: · you meet the income requirement - section 35-10(2E) - and you pass one of the four tests - section 35-30, 35-35, 35-40, 35-45 · the exceptions contained in section 35-10 of the ITAA 1997 apply; or · the Commissioner exercises his discretion under section 35-55 of the ITAA 1997. In your situation, you do not satisfy the income requirement (that is, your adjusted taxable income, excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions in section 35-10. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion contained in paragraph 35-55(1)(a) 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 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 year(s) 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. Having regard to your full circumstances, it is accepted that your activities were affected by special circumstances outside your control as this term is used in paragraph 35-55(1)(a) of the ITAA 1997. Further, it is accepted that, for the year in question: o but for the special circumstances, you would have made a profit; and o you have met one of the four tests or would have but for special circumstances. Consequently, the Commissioner will exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 200Z financial year in relation to your farming activity.