Private ruling: non-commercial losses
Published: January 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: During 2001

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: Yes

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business devoted towards horticulture. You have operated this business since 20XX growing wine grapes and citrus trees. Due to drought and reduced water allocations for a number of years as well as being in an Exceptional Circumstances declared area the profitability of your business has suffered. In 2009, as a result of the adverse conditions, you decided to focus on citrus growing only. In late 2009, the citrus trees were affected by severe temperatures during the start of the flowering period. The severe temperatures plus water restrictions resulted in an exceptionally low harvest in 2010. Citrus income in the 2010-11 financial year represented X% of the corresponding income in the 2008-09 financial year. You expect the 2011-12 financial year harvest to be a good one with income expected to be well over $20,000.

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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