Private ruling: non-commercial losses
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1997

Ruling: A1: Yes.

Relevant facts and circumstances: You own and lease a primary production business. You pay all the expenses for the leased properties. Establishment of the business commenced in the 1990s. The properties are close to a dam which is the major irrigation supply dam in the area. Water levels in the dam have been extremely low for the last five years. In the recen year the dam level increased to just under 50% and is currently at 100%. Drought was officially declared in your area in late 2000 and was not officially revoked until early 2009.. The time in drought far exceeded anything in the previous 100 years. Your family has been farming continuously in the area since early 1900s. According to data obtained from the Department of Environment & Resource Management the longest drought in previous records to 2008 was four years which occurred in 1990s. Prior to that time, the previous longest period of extended drought was three years in the 1960s. Your family's collective anecdotal memory gave you confidence that no drought had lasted more than four years in about 100 years. The 2007 and 2008 harvest suffered the full impact of the drought and a complete lack of water for irrigation purposes. The 2009 harvest was significantly better than the prior two years and this was due to increased rainfall in the area during the flowering period. This rainfall signalled the end of the drought. With the drought over, all expectations were that the 2010 harvest would surpass that of 2009. These expectations were not met due to the decision by the water authority not to release water for irrigation purposes, also deterioration in irrigation equipment occurred because it is dependent on water throughput to ensure efficiency. You provided figures for the yield produced off your business for the past six years. The yields have decreased significantly since 2006 (2005 and 2006 are benchmarked as within the acceptable range of optimal yields). The table below compares the actual loss incurred during 2009-10 financial year, to the outcome which you and your expert consultant believe would have been obtained if sufficient irrigation water had been made available. Income 2010 Actual Estimated Total Yield (tonne) 2XX.XXX 7XX.XXX Total Income $1XX,XXX $4XX,XXX Total Expenses $4XX,XXX $4XX,XXX Net Income/(loss) ($2XX,XXX) $1X,XXX The estimate of yields is conservative at about 7XX tonnes compared with about 9XX tonnes for the 2006 harvest. The estimate allows for some loss of production due to the severe impact of the drought and the time to get the business back to full production. The failure by the water authority to release irrigation water during the relevant year had a catastrophic affect on the business. In the attempt to produce yields sufficient to meet short-term supply needs and minimise operational expenses some areas were put into hibernation in an attempt reduce losses. Putting this area in hibernation meant no fertilizer or water was added. Projections, based on the actual data for the 2010-11 financial year and conservative estimates for the following years, based on the area being brought out of hibernation, were provided: Total yields for the 2010-11 financial year are based on actual data as the 2010-11 financial year's harvest has already occurred. The combination of hibernation blocks and severe flooding just prior to harvest meant that the 2010-11 financial year's crop was one of the worst on record. You and your consultants are optimistic that with improved irrigation supply, you will be able to bring the majority of the business back to life in the 2011-12 financial year (though at below average yields) and commercially viable yields will be achieved in the 2012-13 and 2013-14 financial years. The water authority has indicated that normal water allocation will be available from the dam for the next few years You understand that it was the decision by the water authority not to provide water for irrigation purposes that led to you incurring the loss from your operations. The value of real estate utilised in the business exceeds $500,000, the value of the other assets employed exceeds $100,000 and the total income exceeds $20,000. Your adjusted taxable income for the 2019-10 financial year will exceed $250,000. Your budget forecasts show that the business should be profitable in the 2012-13 financial year.


Reasons for decision: Detailed Reasoning - Detailed reasoning: For the 2009-10 financial year 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 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 for the 2009-10 financial year to the 2011-12 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. | Subject: non-commercial losses: 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 particular crop growing activity in your calculation of taxable income for 2009-10 to 2011-12 financial years?