Private ruling: 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)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your farming enterprise in your calculation of taxable income for the 2009-10 and 2010-11 financial years? Answers: Yes. 2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your farming enterprise in your calculation of taxable income for the 2011-12 and 2012-13 financial years? Answers: 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 - 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. | 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 provided independent evidence which suggests the commercially viable period for your industry is three to five 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 2013-14 financial year, or five years after you commenced your business activities. You have stated that in the 2008-09 to 2010-11 financial years, your business activities were affected by drought and floods. The drought had affected the property in the early years and you planted trees to combat soil erosion and installing stock proof fencing to allow pastures to recover. In the recent year, the property was affected by flooding which resulted in major earth works required to repair roads and eroded gullies. Damaged fences had to be replaced and crops and pastures had to be replanted and re-established. Livestock was sold early or sent away on agistment to enable repairs to be carried out. As a result of the floods, the expected time frame to reach profitability has been delayed by three to five years. These circumstances, in the form of drought and floods, were outside your control and, therefore, are accepted as 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. These special circumstances are the sole 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 2013-14 financial year. 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 year and in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2011-12 and 2012-13 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. | Relevant facts: You purchased your property in 200X for the purposes of livestock breeding and organic farming. | The property was not purchased as a going concern. | The property was affected by drought in the various income years and you planted trees to combat soil erosion and installed stock proof fencing to allow pastures to recover. | In a recent year, the property was affected by flooding. | As a result of these events: | · the property required major earth works to repair roads and eroded gullies | · crops and pastures had to be replanted and re-established; and | You have incurred additional expenses for flood mitigation and repairs to fences and pastures as a result of the floods. | An independent report states that, as a result of the floods, the expected time frame for your activities to reach profitability has been delayed by three to five years. | You now project your activities will produce a tax profit in the 2013-14 financial year. | Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this to be the case for the 2010-11 to 2012-13 financial years as well.