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Edited version of private ruling
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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 years ended 30 June 2010 to 2012?
No.
This ruling applies for the period:
1 July 2009 to 30 June 2012
Relevant facts
You have leased a part of a primary production activity that has been in operation for several years at a specified location. The activity has been adversely affected by a circumstance for several years starting from a year before leasing it.
The circumstance has had a catastrophic effect on the production in the past years. You have provided details of the circumstance and the effect of it on your activity. You state that your activity will take a number of years to recover to the point of profitability.
Your income for income requirement purposes exceeds $250,000.
A copy of a report provided by you indicates that your activity has been affected by a second circumstance as well. You have provided relevant pages of a copy of your lease agreement showing the conditions attached to it and the effective date of the agreement.
You have provided details of actual income you received from your activity for past years and projected income and expenses details for future years.
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 subsection 35-10(2E)
Income Tax Assessment Act 1997 subsection 35-10(2)
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 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:
· 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.
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).
In the context of section 35-35 of the ITAA 1997 ((b) above), a 'taxation profit' for the income year in question is where the amount of assessable income from the business activity for that year, is greater than the sum of the deductions attributable to it for that year (apart from the operation of subsection 35-10(2) of the ITAA 1997).
You satisfy income requirement in subsection 35-10(2E) of the ITAA 1997 if the sum of the following is less than $250,000:
· your taxable income for that year
· your reportable fringe benefits total for that year
· your reportable superannuation contributions for that year
· your total net investment losses for that year.
For the purposes of paragraph (a) above, tax losses for any business activity that could otherwise be deductible must be disregarded.
Information you have provided in your tax returns shows that you have not satisfied the income requirement as your relevant income has exceeded $250,000. Therefore, the loss from your activity will not be taken into account in the relevant years unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997.
To apply the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity would be affected in the relevant years due to the special circumstances.
Your primary production activity will only be potentially subject to the provisions in Division 35 of the ITAA 1997, if it is carried on as a business. If your activity is not carried on as a business, then you cannot claim general deductions in relation to it. This ruling is made on the basis that your activity is carried on as a business.
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 concept of 'control' was discussed in Secretary, Department of Employment, Education and Youth Affairs v. Ferguson (1997) 76 FCR 426; (1997) 48 ALD 593; (1997) 147 ALR 295 for the purposes of subsection 45(6) of the Employment Services Act 1994. At 76 FCR 438; 48 ALD 603; 147 ALR 306, Mansfield J said:
The expression in s45(6)(a) requires that the main reason for the failure was something that the person had within that person's control. The concept of 'control' in that context is one of fact, but I think it is intended to mean something which the person could have done something about.
And at 76 FCR 438, 48 ALD 603; 147 ALR 306:
It recognises the focus of the expression upon occurrences which the person concerned could not realistically prevent.
Paragraph 58 of Taxation Ruling TR 2007/6 reads:
Similarly, the acquisition of a poorly run but promising business activity would generally be considered to be within the control of the business operator and as such would not, by itself, constitute special circumstances, even though the actions of the former operator may have been outside the control of the current operator.
Special circumstances in Paragraph 35-55(1)(a) of the ITAA 1997 includes drought. However, the circumstance has to be outside the control of the operators in order to consider it as special.
Information provided by you indicates that you leased the primary production activity while the activity had been experiencing the adverse effects of the circumstances. As discussed in Secretary, Department of Employment, Education and Youth Affairs v. Ferguson (1997), the concept of 'control' is intended to mean which the person could have done something about and the person could not realistically prevent.
Your decision to lease the activity was clearly within your control and you could have realistically prevented. As explained in paragraph 58 of Taxation Ruling TR 2007/6 the acquisition of a poorly run but promising business activity is considered within the control of the business operator and as such would not constitute special circumstances. We consider your circumstances are similar to that explained in the ruling.
In your case, you have taken a business risk while you were aware of the ongoing adverse circumstances. The difficulties experienced are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997 as the Commissioner cannot be satisfied that the circumstance was out of your control.
Although the information in a report you provided refers to other circumstances, one of the major circumstances was related to the existing circumstance. Other circumstances are minor. Accordingly, we do not accept that your activity would have made a profit had those circumstances not occurred.
Summary of reasons for decision
The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years ended 30 June 2010 to 2012 on the basis that it is not accepted that the circumstances are special circumstances in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.
The rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any losses that arise from your primary production activity for those years. 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.
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