Edited version of private ruling

Authorisation Number: 1011544055177

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Ruling

Subject: NCL - 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 form your non-primary production activity in your calculation of taxable income for the 2008-09 and 2009-10 income years?

Yes.

This ruling applies for the following years:

2008-09 income year

2009-10 income year

Relevant facts

You have incorporated the following information in your application for a private ruling:

· You have been operating your non-primary production activity that you have acquired in a past year.

· For a period of time after commencing, you could not proceed operating your business due to certain circumstances that were beyond your control.

· At a later stage you scaled down your activity due to those circumstances.

· Your activity was in sharp decline and it was subsequently closed down.

You provided further information that included:

· Independent evidence for the circumstances.

· A copy of the profit and loss statement for the 2009-10 income year that included stock trading account.

You have stated that there had been no trading except isolated sales of stocks in the 2009-10 income year.

Information provided in your tax returns shows that your activity has returned income in excess of $20,000 in the years prior to the years for which you have requested the Commissioner's discretion.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-55

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

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 subsection 35-10(2E)

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

Income Tax Assessment Act 1997 subsection 35-10(4)

Reasons for decision

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:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

On the facts given, the exception in subsection 35-10(4) of the ITAA 1997, has no relevance for the purpose of this ruling.

In broad terms, the tests require:

(a) at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)

(b) the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

(c) at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or

(d) at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

Your non-primary production activity will only be potentially subject to these provisions if it is carried on as a business. If your activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997.

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

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

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a *business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

The above paragraph refers to 'special circumstances' outside 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.

It can be seen that 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.

For 2008-09 and 2009-10 income years your activity did not pass any of the tests. Independent evidence you provided indicates the occurrence of a certain circumstance and its adverse effect on your activity causing interruption to its operation.

Paragraph 13 of the Taxation Ruling TR 2007/6 reads "Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35."

Your circumstance was unusual and beyond your control and for those income years the activity did not satisfy the assessable income test. The information you have provided and supported by independent evidence shows that the circumstance adversely affected your non-primary production activity. The Commissioner accepts your circumstance that materially affected your activity is a 'special circumstance' as these terms are used in paragraph 35-55(1)(a) of the ITAA 1997.

Your activity passed the assessable income test in the years prior to the years for which you have requested the Commissioner's discretion. The Commissioner accepts that your activity would have returned sufficient income and passed the assessable income test for the 2008-09 and 2009-10 income years had the special circumstance did not occurring.

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 2008-09 and 2009-10 income years. This means that any loss for your activity in those years can be taken in to account in calculating your taxable income.

Summary of reasons for decision

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 in relation to your non-primary production activity for the 2008-09 and income year on the basis that, from the evidence you have supplies:

· your activity was carried on by you as a business, and

· it is because of a special circumstance outside your control that the business activity did not satisfy the assessable income test in section 35-30 of the ITAA 1997.

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