Private ruling: Non-commercial losses - Commissioner's discretion
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)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your livestock fattening activity in the calculation of your taxable income for the 2009-10 financial year? | A1: Yes.


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 - Paragraph 35-55(1)(a) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c)

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless: · you meet the income requirement and you pass one of the four tests · the exceptions apply · 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 do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. | Detailed Reasoning - Special circumstances (first limb): The Commissioner's discretion in paragraph 35-55(1)(a) 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 generally those which have materially affected the business activity, causing it to make a loss. Special circumstances can include things like droughts and floods (Taxation Ruling TR 2007/6). | Detailed Reasoning - Nature of the activity (second limb): The Commissioner's discretion in paragraph 35-55(1)(c) may be exercised for the financial year where 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. | Detailed Reasoning - Interaction between the limbs: As stated above, ordinarily the operation of the first limb is confined to those situations in which the business activity has been affected by special circumstances outside the control of the operators of that activity where, had these circumstances not existed; the activity would have made a tax profit. However, the first limb may also apply to a business activity affected by such circumstances during a time when 'because of its nature' it is not able to produce a tax profit, but this time is still 'within [the] period that is commercially viable for the industry concerned'. In such a case, the enquiry is not whether the activity would have produced a tax profit had the special circumstances not existed (paragraphs 35 55(1)(b) and (c) already recognise that there are reasons outside the control of the operators of the activity why this would not have occurred, regardless of the existence of the special circumstances). In such cases the appropriate enquiry will be whether or not the special circumstances have meant that there is no longer an objective expectation that within the period that is commercially viable for the industry concerned the activity will produce a tax profit. Where the special circumstances are the sole reason why the activity can no longer objectively be expected to produce a tax profit within the period that is commercially viable for the industry concerned, but the activity is now expected to consistently produce a profit at some later time, the discretion may be exercised. In your case, you have advised that the commercially viable period for your industry is three to four years. You have also provided projected profit and loss statements that show you do not expect to produce income greater than the deductions attributable to it until the 2012-13 financial year, or five years after you commenced your business activities. You have stated that in the 2009-10 financial year, your business activity was affected by drought which meant you had to sell all of your livestock at a reduced price. Once the drought broke, you were unable to buy suitable fattening livestock and you bought females and young livestock instead. Having to buy unsuitable livestock has extended the time it would have taken for the activity to become commercially viable. These circumstances were outside your control and are accepted as 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. These special circumstances are the reason why your activities will not produce a tax profit within the period that is commercially viable for your industry, but is now expected to produce a tax profit by the 2012-13 financial year. The Commissioner will exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 financial year.

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. | Relevant facts: You commenced a livestock fattening activity in the 2007-08 financial year. | When you purchased the property, it was in a neglected state and you have undertaken work including fencing, creating stock lanes, establishing fodder paddocks and a bore, piping and water troughs. You also purchased equipment and built a shed to house the equipment. | During the 2009-10 financial year, you had to sell all your livestock because of drought before they were ready and did not get a good price for them. | When the rain came, you could not buy suitable fattening livestock but had to buy some females and young livestock which did not generate significant profit. This has meant that the period for your activity to become commercially viable has been extended. | You have projected that your activity will achieve a profit in the 2012-13 financial year. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year.