Private ruling: Non Commercial Losses - Primary production activity
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), thus allowing you to offset losses from your primary production activities against your other assessable income for the year ended 30 June 2010 ? | A1: 




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: The company commenced with the purchase of farming land. The partnership purchased land and relocated its business to that property. The partnership expanded the business to include primary production activity. | With many years experience in primary production, the partnership has had high value transactions during the relevant year. | Over the past few years, the industry as a whole has been affected by :- | · Severe drought conditions. As a result there was no sale of crops from this property. All crops on the property had to be cut down for fodder for the stock. This did not supply the business with its total feed requirements. Extra fodder had to be purchased to enable it to survive. | · The livestock disease, adversely disrupted primary production activities. | · The Global Financial Crisis reduced the average and mean prices of livestock. | Application to your circumstances: In regard to the "special circumstances' rule, TR 2007/6 details when the Commissioner would exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. | Paragraph 13 of Taxation Ruling TR 2007/6 states that 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. Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35. In other cases, where the business activity would have failed a test in any event, because it is still within the period that is commercially viable for the industry concerned, the special circumstances may extend the time within which that particular business activity could objectively be expected to pass a test. | Paragraph 13A of Taxation Ruling TR 2007/6 states that for those individuals who do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997, 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) of the ITAA 1997, may be exercised for the income years 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 at least one of the four tests | As you do not satisfy the income requirement in subsection 35-10(2E), ie your income for the purposes of the subsection exceeds $250,000, these special circumstances must have materially affected the primary production activity, causing it to make a loss. | The special circumstances you have mentioned did not commence until only a few years ago. However your primary production activity commenced earlier. The years prior did not have any special circumstances, yet your activity was making losses at that time. This suggests that even without the special circumstances, the activity would not have made a profit. | The Commissioner considers the drought and livestock disease as 'special circumstances', but you have not demonstrated to the Commissioner's satisfaction that these two events prevented a profit from being made. | For a number of earlier years, no special circumstances affected your business, yet your primary production activity continued making losses. Whilst the losses incurred were larger after the special circumstances, you have not been able to demonstrate to the Commissioner's satisfaction, that if the special circumstances had not occurred, you would, in fact, have made a profit. | Furthermore, there has been no constant downward trend in the losses being made over the ten year period. | Hence the first limb of Paragraph 13A of TR 2007/6 above is not satisfied. | Although your business activity has passed at least one of the four tests, both limbs of Paragraph 13A of TR 2007/6 are necessary for the Commissioner to exercise his discretion. | As the Commissioner is not satisfied that the special circumstances put forward, prevented a profit being made, the discretion under paragraph 35-55(1)(a) of the ITAA 1997, will not be exercised. The losses are deferred to a future year, and can be claimed when either a tax profit is made, or one of the four tests is satisfied in conjunction with the income requirement.