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Edited version of private ruling

Authorisation Number: 1011843470469

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Ruling

Subject: Commissioner's discretion - special circumstances

Questions:

1. 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 farming activities in your calculation of taxable income for the 2009-10 and 2010-11 financial years?

Answer: Yes.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your farming activities in your calculation of taxable income for the 2011-12 to 2013-14 financial years?

Answer: No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts

You carry on farming business activities.

The property has been affected by drought conditions, in varying degrees, over the past decade and has resulted in:

inadequate pastures for livestock

In the 2009-10 financial year, you estimate the drought conditions have cost the business over $X00,000, in lost income.

In the 2010-11 financial year, the property was affected by flooding at an estimated cost of over $Y00,000.

Your farming activities produced a loss of almost $X00,000 in the 2009-10 financial year and you anticipate your activities will produce a loss of approximately $Y00,000 in the 2010-11 financial year.

You project that your farming activities will not become profitable again until the 2014-15 financial year.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this will be the case for the 2010-11 to 2013-14 financial years as well.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

Reasons for decision

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

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

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2009-10 financial year and you expect this will be the case in the 2010-11 to 2013-14 financial years as well.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. 

Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

In your case, your farming activities were affected by drought conditions over an extended period of time and then, in the 2010-11 financial year, experienced severe flooding. It is accept that these conditions were outside your control and, therefore, are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss.

In the 2009-10 financial year, your farming activities incurred a loss of almost $X00,000 due to the drought. You estimate that the drought conditions cost the business approximately $X00,000 in lost income in that year. In the 20010-11 financial year, you project that your farming activities will incur a loss approximately $Y00,000 due to the flooding event. You estimate the flood will have cost the business over $Y00,000 in lost income.

The Commissioner is satisfied that your activities would have made a profit in the 2009-10 financial year, and would have been expected to make a profit in the 2010-11 financial year, had it not been affected by these special circumstances.

However, based on the information provided, the Commissioner is not satisfied at this time that these same special circumstances will continue to cause your activities to make a loss in the 2011-12 to 2013-14 financial years as you have projected.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 and 2010-11 financial years but is unable to exercise the discretion for the 2011-12 to 2013-14 financial years.

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