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Edited version of private ruling

Authorisation Number: 1011580000694

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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 2009-10 income year?

No.

This ruling applies for the following periods

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You purchased a primary production activity as a going concern.

The property was settled on certain conditions. You provided some rights to the vendor with regards to the activity.

Following the purchase of the property you made some improvements to the property.

The vendors have received in excess of $20,000 from the activity in previous years. You expect to receive in excess of $20,000 and satisfy the assessable income test in section 35-30 of the ITAA 1997 in the relevant income year.

You did not satisfy any of the tests in Division 35 of the ITAA 1997 or receive a profit in the relevant income year.

You state that you were not able to satisfy the assessable income test in section 35-30 of the ITAA 1997 and the other assets test in section 35-45 of the ITAA 1997 in the 2009-10 income year due to the conditions stated in the settlement.

The income tax returns you have previously lodged show that you have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

Therefore, you have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the activity for the relevant income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 35-10.

Income Tax Assessment Act 1997 section 35-30.

Income Tax Assessment Act 1997 section 35-45.

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, go to our website www.ato.gov.au 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.

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:

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed (in conjunction with the income requirement), the discretion is exercised, or the exception applies.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain tests) in order to include losses from a business activity in your taxable income calculation. You have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

Your primary production activity will only be potentially subject to these provisions if it is carried on as a business. You have stated that the activity is carried on as a business and this ruling is made on the basis of accepting that claim.

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

The note to paragraph 35-55(1)(a) states that 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 circumstance.

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.

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 the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity was affected in the year by the special circumstances.

You stated that you did not satisfy the assessable income test in section 35-30 of the ITAA 1997 due to a condition in the settlement.

You have also stated that you did not satisfy the other assets test in section 35-45 of the ITAA 1997 due to the unavailability of some information following the purchase of the property.

Those difficulties you experienced are not considered to be 'special circumstances' outside your control for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. It was your decision to purchase the property with conditions attached to the sale.

In view of the above, it is not accepted that the difficulties you faced were sufficiently 'unusual' to constitute 'special circumstances' and that it prevented the activity from passing the assessable income test in section 35-30 and the other assets test in section 35-45 of the ITAA 1997 for the 2009-10 income year.

As your business activity was not affected by 'special circumstances' in the sense required by paragraph 35-55 (1)(a) of the ITAA 1997 in the relevant income year, the Commissioner is therefore not 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 apply to your business activity for the relevant income year. This means that any 'loss' from that activity can not be taken into account in the calculation of your taxable income for that income 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 of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 income year on the basis that the difficulties you encountered are not considered to be 'special circumstance' in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

As no test was satisfied in the relevant income year, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss in relation to your activity for that year. A deferred loss is not disallowed and will be deductible against any taxation profit from your business activity, or similar business activity, in the future years.

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