Private ruling: Non commercial losses - Commissioner's discretion
Ruling period: Year ended 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2009

Ruling: Q1: 1. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production enterprise in your calculation of taxable income for the 2009-10 to 2012-13 financial years? | A2: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a). | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2009-10 financial year and you expect this will be the case in the 2010-11 to 2012-13 financial years as well. The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. In your case, you commenced your primary production activities in or about the 2002-03 financial year, with substantial crops being produced from 2006 and full production reached in the 2007-08 financial year when the activity produced an overall profit. This was six years after the activity commenced. You have provided evidence from a recognised expert in the field that states that the breakeven point of this type of enterprise will depend on the nature of the project, with many variables to be considered, and can be anything from seven years to beyond ten. Your projected budget figures show that you expect your activities to continue to produce a loss up to and including the 2012-13 financial year and a tax profit is not expected until at least the 2013-14 financial year, or 12 years after your activities commenced. Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is 12 years. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to 2012-13 financial years. The reason your activities made a loss in the 2009-10 financial year, and is expected to make a loss in the 2010-11 financial year, is due, in part, to the extreme weather conditions which effected the region where your property is located. The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss. Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling: Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. In your case, the region where your property is located was drought affected for many years. When your water allocations were significantly reduced you were required to find water from other sources in order to continue and, in the 2008-09 financial year, you were forced to purchase under ground water. Extreme heat early in the 2010-11 financial year has resulted in lower estimated yields; down 25% on previous years. It is accepted that these conditions were outside your control and, therefore, are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss. In your case, you have incurred additional water costs in an attempt to mitigate the affects of the drought on your primary production activities with operating expenses almost doubled between the 2007-08 and 2009-10 financial years. These costs include the purchase of under ground water, and associated expenses, and a significant investment in infrastructure to secure a water supply for the region into the future. In addition, extreme heat in the 2010-11 financial year resulted in a 25% reduction in yields for that year and this, coupled with additional water costs, has contributed to your anticipated loss for this financial year. The Commissioner is satisfied that your activities would have made a profit in the 2009-10 financial year, and would have been expected to make a profit in the 2010-11 financial year, had it not been affected by these special circumstances. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 and 2010-11 financial years.

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. | 2. 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 enterprise in the calculation of your taxable income for the 2009-10 and 2010-11 income years? | Relevant facts: You commenced your primary production enterprise in 2002. | The enterprise was established over two years and has produced substantial crops since 2006. | In the 2007-08 financial year, the activity produced its first full crop and an overall profit of approximately $80,000. | Drought conditions affected the region between 2003 and 2009 and you took the following steps over this period: | In the 2008-09 financial year, when water allocations were cut, you had to purchase under ground water; incurring the cost of drilling a bore and leasing water. | In addition, you have made a significant investment in infrastructure to secure a water supply for the region into the future. | As a result, your running costs have almost doubled since the 2007-08 financial year. | More recent weather events have affected the crop yields for the 2010-11 financial year, including: | · Extreme heat early in the 2010-11 financial year has resulted in lower estimated yields; down by approximately 25% on previous years. | · Additional water costs were incurred to mitigate the affects of the extreme weather events. | Your income for non commercial loss purposes for the 2009-10 financial year was more than $250,000 and you also expect your income to be more than $250,000 in the 2010-11 to 2012-13 financial years.