Private ruling: Non-commercial losses
Published: April 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2001

Ruling: Q1: 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 business activity in your calculation of taxable income for the 2010-11 to 2011-12 financial years? | A1: 

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business. The partnership commenced in the 200-01 financial year. The business was purchased as a going concern although in need of repair. Your region was drought declared for a number of years in the 2000's. The drought eased in the 2009-10. You submit that as a result of the drought, you substantially reduced your carrying capacity because of the loss of grazing and pastoral feed. Your irrigation water allocations were also restricted, substantially reducing the normal high productivity of your land cropping. Carry over irrigation water allocations were able to be used to irrigate pasture enabling livestock numbers to be sustained and increased. Lucerne is not ideal for all livestock. You increased one type of livestock numbers to utilise the available feed and try and to create farm cash flow. In 2010 your business was affected by flooding. Improved weather conditions have now allowed you to commence re-establishment of pastures and complete capital works to replace flood damaged pumps and irrigation systems. Your business has yet to make a profit. You anticipate that you will make a tax profit in the 2012-13 financial year.

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, 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. It is accepted in your case that the drought constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. You have stated that your primary production business losses for the 2005-06 financial year onwards have been due to the drought. You wish the Commissioner to apply his discretion in relation to the 2010-11 and 2011-12 financial years. Obviously the extent of the losses during this period has been contributed to by the drought. But this is not sufficient for the Commissioner to be able to exercise the special circumstances discretion. He must be satisfied that you would have made a profit but for the drought. It would be expected that if it was only the residual effects of the drought that caused your primary production business to make a loss in the 2010-11 to 2011-12 financial years, then it would have made a profit in the year preceding the drought where normal rainfall was experienced. It is noted that from 2005-06 to 2006-07 financial years you were able to more than double the number of one type of livestock on the property. Their numbers carried on the property was consistently higher in drought years than in the years preceding the drought. Furthermore, if other livestock sales had been at non-drought levels your business still would have produced a loss. In relation to the flooding which occurred in 2010, whilst we also accept that this natural disaster negatively affected your property you have provided insufficient proof that had it not been for these adverse weather conditions your business would have made a profit. If the loss in crops is accounted for together with the increased capital expenditure that you have estimated you would still have returned a loss in the 2010-11 financial. Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for the 2010-11 to 2011-12 financial years.

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