Private ruling: Non-commercial losses and the Commissioner's discretion
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

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 farming enterprise in your calculation of taxable income for the 2010-11 financial year? | A1: No.


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).

Reasons for decision: Summary: For the 2009-10 and later income years division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless: · the individual's business activity meets one of the four tests and the income requirement is also satisfied;· · the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997; or · the individual comes within the Exception contained in subsection 35-10(4) of the ITAA 1997. (refer subsection 35-10(1) of the ITAA 1997). You have not satisfied the income requirement as the relevant income exceeds $250,000 and the exception in subsection 35-10(4) of the ITAA 1997 does not apply. Losses made from the activity in this year are therefore subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides under paragraph 35-55(1)(a) of the ITAA 1997 that it would be unreasonable for this to occur. The Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question 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. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year in question where: · but for the special circumstances, the business activity would have made a tax profit; and · the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. In your case, you meet the income test and the real property test. You advise your activities have been affected by drought. However, from the information you have provided in the income and expenses statement for the 2005-06 to 2008-09 financial years, it can be seen that the budgeted amounts for the 2010-11 financial year are not comparable to the average of the four years. Therefore, to establish whether a profit would have been made but for the weather conditions, we need to make a comparison based on the actual data available. Your loss for the 2010-11 financial year was approximately $Q. The average income from the farm activities for the 2005-06 to 2008-09 financial years was slightly less than for the 2010-11 financial year. You incurred additional expenses which may be related to drought conditions for fertiliser. It is considered that allowing for the additional expenses caused by the drought, you still would not have made a profit. Additionally, as you have not made a profit since commencing the activity, we consider that it would be unlikely that a profit would have been made in the 2010-11 financial year. In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the 2010-11 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. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | · the application for private ruling received May 2012 and | · summary of actual v budget income and expenses for 2010-11 financial year and | · summary of income and expenses for 2005-06 to 2009-10 financial years as provided in April 2011 for the private ruling for the 2009-10 financial year. | You are a partner in a primary production partnership. | The farm activities have been carried on for a period of approximately 18 years. | The farms and infrastructure are estimated to be worth in excess of $10million. | Production consists of grazing, cereal cropping. | You were significantly affected by the severe drought conditions which prevailed during the financial year ended 30 June, 2010. | Farm activity was forecasted to improve in 2011 year but drought conditions still prevailed and resulted in significantly reduced results. | Drought conditions affected the crops. There was no yield of wool in the 2011 year as the paddocks were not of sufficient quality. There was also a significant increase in expenditure on fertiliser and repairs to plant on account of the drought. | You provided a comparison of the 2010-11 actual v budget that shows the drop in revenue from $X as projected to $Y and the increase in expenditure from $Z to $W. | You employ the services of a specialist to assist with the preparation of detailed business plans, cash flow forecasts and budgets. | In the 2005-06 to 2008-09 financial years, the partnership made losses. | You made a loss in the 2010-11 financial year. According to your budget, had there not been a drought, you would have made a profit. | Your income for non-commercial loss purposes in the 2009-10 financial year is in excess of $V.