Edited version of private ruling

Authorisation Number: 1011623979685

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Ruling

Subject: NCL - 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 year ended 30 June 2010?

Answer

Yes

This ruling applies for: Year ended 30 June 2010

Relevant facts

You operate a primary production activity in a partnership at a particular location.

Your income for non-commercial loss purposes is more than $250,000.

In 2010 as a result of a circumstance the average sale price of your products reduced while you had to incur additional expenses to overcome the adverse effect.

Your activity made taxable profits in the years prior to the relevant year.

Your activity made a loss in the year ended 30 June 2010.

It is expected in the year ending 30 June 2011 your activity will be profitable again.

You have provided evidence from independent sources for the special circumstance.

Does Part IVA 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 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.

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(2)

Reasons for decision

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 years ended 30 June 2010 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 is affected in the relevant year by the special circumstances.

Your primary production activity has been adversely affected by the circumstance and as a result you had to sell your product at a greatly reduced price. As a consequence your assessable income vastly reduced while you had to incur additional expenses in the year ended 30 June 2010.

The independent evidence you provided confirms that your activity had been adversely affected by the circumstance. This circumstance was outside your control and therefore it is accepted as a special circumstance as this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

Your activity made tax profits in the years prior to the year ended 30 June 2010. Therefore the Commissioner is satisfied that your activity would have made a profit in the year ended 30 June 2010 had it not been adversely affected.

Note:

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the income year in question. That decision can only be made in issuing you your assessment, following lodgement of your income tax return for this income year, being that for the income year ending 30 June 2010. You can lodge this return on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

Summary of reasons for decision

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the year ended 30 June 2010 on the basis that it is accepted that the drought is a special circumstance in the sense in which this term is used in Division 35 of the ITAA 1997 and your activity had been affected by the circumstance.

The Commissioner is satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your primary production activity. This means that any loss for your activity can be taken into account in calculating your taxable income for the year ended 30 June 2010.

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