Private ruling: non commercial losses
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

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 business activity in your calculation of taxable income for the 2009-10 income year? | A1: Yes.

Relevant facts and circumstances: Your farming enterprise has been profitable several times in its history. The most recent profitable year was the 200X financial year. The business has always passed the assessable income test, the real property test and the other assets test. Since 200X your properties have experienced drought conditions. As a result additional costs have been incurred by the business. Feed had to be bought for animals or the animals taken to where the food is, increasing feed and freight costs. The price of seed, fertilizer, sprays and spraying costs also increased due to the drought. You submit that because of the drought annual sales decreased and prices dropped. You submit that due to the nature of your enterprise you are not able to sell stock in dry times and buy back in better times as a commercial livestock enterprise can as you need to keep your genetic herd. When the drought breaks you need to be ready to supply the market. You submit that you would have made a profit but for the drought. You have provided financial information for the 2009-10 financial year and your estimates of income and expenditure had there not been a drought. You expect to make a profit in the 2010-11 financial year. Your income from other sources in the 2009-10 financial year exceeds $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 35-1 | Income Tax Assessment Act 1997 paragraph 35-55(1)(a) | 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 Income Tax Assessment Act 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 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 · 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 2009-10 financial year.

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