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Ruling

Subject: non commercial losses - Commissioner's discretion

Question

Will the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2009-10 financial year to allow you to deduct your losses from your vineyard due to special circumstances?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

Some years ago you purchased a property.

The property is currently under contract for the sale of fruit.

You engage contractors and staff to assist in the day to day running of the property.

You made a loss in the 2009-10 financial year. You provided a list of reasons for the loss.

Your income for non commercial loss purposes is in excess of $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-55

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

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

Reasons for decision

Section 35-10 of the ITAA 1997 was amended to include an income requirement that must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. The income requirement applies in relation to the 2009-10 financial year and later years.

You satisfy the income requirement under section 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case you have not satisfied the income requirement as your relevant income exceeded $250,000 in the 2009-10 financial year. Therefore the loss from your activity will not be taken into account unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997.

The Commissioner may exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 where special circumstances have prevented a taxpayer from making a tax profit.

No exhaustive definition of 'special circumstances' is given in the legislation.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course…

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. Taxation Ruling TR 2007/6 states at paragraph 47:

You advised that your activities have been affected by a low price per tonne, low tonnage produced due to weather conditions and disease. You have also cited various factors affecting growers including an oversupply of product, an increase in competition, a strong Australian dollar and the global financial crisis.

It is considered that receiving a low price per tonne of product and producing a low tonnage due to poor weather conditions and disease are a result of ordinary recurrent weather and market fluctuations that affect all businesses within your industry, and are circumstances that might be reasonably expected to occur when carrying on a business activity. Also whilst we accept that the strong Australian dollar and global financial crisis was not within your control, we consider the fluctuations to be a normal part of the share market and financial industry. We consider the negative factors you have cited affecting the industry as a whole to be normal occurrences and not unusual, uncommon or exceptional.

Therefore the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 financial year as you have not shown that special circumstances prevented you from making a tax profit.

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