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Edited version of private ruling

Authorisation Number: 1011423156999

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Ruling

Subject: Commissioner Discretion Special Circumstances

Question

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 the loss that you incurred from your business activity in your calculation of taxable income for the year ended 30 June 2009?

Answer

Yes

This ruling applies for the following period/s:

Year ended 30 June 2009

The scheme commences on:

Year ended 30 June 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

During the year ended 30 June 2009 you operated a primary production business.

You expected to receive in excess of $20,000 and satisfy the Assessable income test in the year ended 30 June 2009. However, the drought conditions prevailed in the area, leading to failed output. Estimated turnover in the first year of operations was not achieved and losses were incurred.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to claim your share of the partnership losses incurred from your activity in the year ended 30 June 2009.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Subsection 35-10(2)

Income Tax Assessment Act 1997 Section 35-55

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

Reasons for decision

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include the loss that you incurred from your business activity in your calculation of taxable income for the year ended 30 June 2009?

Yes.

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

You state that your primary production activity is carried on as a business and this ruling is made on the basis of accepting this claim.

As the exception and a test is not met, you have applied for the Commissioner's discretion to be applied in terms of paragraph 35-55(1)(a) of the ITAA 1997.

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of the Commissioner's discretion as follows:

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters.

To determine what is 'special circumstances', we need to look at the context in which the phrase is used. Also, it is clear that 'special circumstances' will be something out of the ordinary or unusual. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. For this to be the case, it will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has resulted in the business activity failing to pass a test. Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by 'special circumstances' in the sense in which this term is used in paragraph 35-55(1)(a), as the Note to the paragraph indicates.

The information you have provided demonstrates that there was a reasonable expectation that your business activity would have satisfied one of the tests in the year ended 30 June 2009, had it not been for the drought and expenses incurred.

It is accepted that the drought and expenses prevented the business activity from passing the Assessable income test in the year ended 30 June 2009 and was sufficiently unusual to constitute special circumstances which were outside the control of the operators of your business activity, namely you and your partner.

As your business activity was affected by special circumstances in the sense required by paragraph 35-55(1)(a) of the ITAA 1997 in the year ended 30 June 2009, the Commissioner is therefore satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your business activity for this year.

In the ruling to which these explanations relate, the Commissioner has stated that under paragraph 35-55(1)(a) of the ITAA 1997, the rule in subsection 35-10(2) of the ITAA 1997 will not apply to your business activity for the year ended 30 June 2009. This means that any 'loss' for that activity can be taken into account in calculating your taxable income for that year, provided that the arrangement carried out does not differ materially from that described in the ruling. If there is a material difference, you may need to apply for another private ruling on how paragraph 35-55(1)(a) would apply to those changed circumstances.

Summary

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 in relation to your primary production activity for the year ended 30 June 2009 on the basis that, from the evidence you have supplied:

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