Edited version of private ruling

Authorisation Number: 1011530009881

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Ruling

Subject: Non-commercial losses-Commissioner's discretion-special circumstances

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 primary production activity in your calculation of taxable income for the 2008-09 income year?

Yes.

This ruling applies for the following period

1 July 2008 to 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You conduct a primary production business. When in full operation the produce, when in season, is sold twice a week to a wholesaler.

The property was purchased many years ago. In approximately the 2002-03 income year, due to market conditions, it was necessary to remove all plants and replace the stocks with a new variety.

Harvesting normally occurs in the post Christmas period with sales traditionally being late January and February. This is seasonal and depends upon the temperate, moisture content and rain leading up to the harvest period. All of these factors determine when the crop ripens and is ready for harvest.

Your business showed a small profit in the 2004 to 2006 income years. However, the crop was severely damaged by the extreme rain in 2006-07 and 2007-08 income years, causing the older plants to become water logged affecting both the root stock and the produce as they become covered with mould and mildew and the young plants to be washed away. The Commissioner exercised the discretion for special circumstances, for rain and flood damage, for the 2007-08 income year.

Severe flooding and rain fall again occurred in your region. This caused damage to the crop that was in the final stages of maturing and ready for picking. The crop was destroyed either from disease or washed away.

A Natural Disaster Declaration was made in relation to your area.

Detailed reasoning

Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997 will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1)(a) of the ITAA 1997 that it would be unreasonable to defer the loss.

Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise the first arm of the discretion where certain special circumstances apply. Special circumstances in this context are those outside the control of the business operator, including those such as drought, flood, bushfire or some other disaster that have materially affected that activity.

It is intended that the Commissioner only exercise this arm of the discretion if one of the tests would have been satisfied but for the special circumstances.

The Commissioner accepts that your business activity was affected by circumstances that were unusual and outside your control and that in the absence of those circumstances it was probable that a taxation profit may have been made from the activity, or one of the four tests passed, for the income year in question.

Therefore the Commissioner's discretion under paragraph 35-55(1)(a) has been granted for the 2008-09 income year.

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