Private ruling: Income Tax on Primary Production
Published: May 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 primary production activity in calculating your taxable income for the 2011-12 financial year? | A1: Yes.

Relevant facts and circumstances: You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the 2011-12 financial year however in future years you will satisfy that requirement. You own and lease farming property. You have conducted a primary production business for a number of years. The drought resulted in your farming operations being reduced. In recent years your primary production business returned a profit in the 20XX-YY and 20YY-ZZ financial years. When the rain started in October 20X1 it kept raining over the summer and autumn which meant it was impossible to sow a crop in autumn of 20X2 therefore the next crop that could be sown was in autumn 20X1. The assessable income test, the real property test and other assets test were met however the drought and flood prevented a profit being made in the 20XX-YY and the 20YY-ZZ financial years. You will make a profit in the 20X1-X2 financial year and also expect a profit in the next financial year.

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

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, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the financial 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 in question where, but for the special circumstances: · your business activity would have made a tax profit · 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 business activity was affected by special circumstances outside your control. Further, it is accepted that: · but for the special circumstances, you would have made a tax profit · you have met one of the four tests or would have but for special circumstances. · Consequently the Commissioner will exercise his discretion in the 2011-12 financial year.