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Edited version of private ruling

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Ruling

Subject: Non-commercial losses - Commissioner's 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 any losses from your primary production activity in your calculation of taxable income for the years ending 30 June 2010 to 2012?

Answer

No.

This ruling applies for the following period

1 July 2009 to 30 June 2012

The scheme commenced

1 July 2009

Relevant facts

You operate a primary production activity that consists of various activities. Your activity is carried on as a business.

You have provided the location and scale of operation of your primary production activity. You have also provided details of difficulties you faced in carrying on your activity.

You have provided information on the occurrence of a certain circumstance that adversely affected your activity in the past.

You have provided projected income and expenditure details for future years.

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-55

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

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 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:

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.

You do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 as your relevant income is more than $250,000. Therefore you require the Commissioner's discretion to claim any losses from your primary production activity in the relevant years.

Your primary production activity will only be potentially subject to these provisions if it is carried on as a business. You have stated that your primary production activity is 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:

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.

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'.

'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 satisfy a test.

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."

You have not provided independent evidence for the circumstance that affected your activity.

Even if the circumstance occurred, your activity did satisfy three of the four tests in the past. Information provided by you indicates that the activity will satisfy at least one test in the years for which you have requested the discretion. Accordingly the circumstance is not a special circumstance in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

The Commissioner is satisfied that it would be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your business activity. This would mean for the years ending 30 June 2010 to 2012 any losses from your primary production activity cannot be claimed and should be deferred to a future income year. A deferred loss is not disallowed and will be deductible against any taxation profit from your primary production activity, or a similar business activity, in the future years.

Summary

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years ending 30 June 2010 to 2012 on the basis that t is not accepted that your activity has been affected by a special circumstance in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997. For those years the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your activity.

A deferred loss is not disallowed and will be deductible against any taxation profit from your primary production activity, or similar business activity, in the future years.

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