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Ruling
Subject: Non-commercial losses - Commissioner's discretion
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 business activity in your calculation of taxable income for the relevant financial year?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You and your spouse have operated a primary production business activity for a number of years, producing product A.
Due to the oversupply of product A which has driven prices down below the cost of production, you have changed to growing product B.
Your product B crop in prior financial year produced assessable income of more than $20,000.
In the prior year and relevant financial years, your property experienced extreme weather conditions which affected the quality of the product B crop in the relevant financial year, resulting in assessable income of less than $20,000.
The subsequent financial year's crop is looking to be of high quality and is expected to produce assessable income in excess of $40,000.
Due to the move from producing product A to product B, you and your spouse have worked off farm to supplement your income and had income of over $40,000 but less than $250,000 in the relevant financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 35
Income Tax Assessment Act 1997 - section 35-10
Income Tax Assessment Act 1997 - section 35-55
Reasons for decision
Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997.
Were the income requirement is satisfied, the Commissioner's discretion, under paragraph 35-55(1)(a) of the ITAA 1997, can be exercised where a business activity is affected by special circumstances, outside the control of the operators, such that it is unable to satisfy any of the tests.
Taxation Ruling TR 2007/6 sets out the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling.
Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. 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 and affect all business within a particular industry.
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.
In your case, the region where your farm is situated experienced extreme weather conditions which affected the quality of the product B crop in the relevant financial year, resulting in assessable income of less than $20,000.
It is accepted that these conditions were outside your control and 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 prevented your activities from meeting one of the tests.
Your product B growing activities produced assessable income in the prior financial year of more than $20,000 and your current years crop is expected to produce assessable income in excess of $40,000.
The Commissioner is satisfied that your activities would have met one of the four tests if it had not been affected by special circumstances.
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 in relation to your product B growing activities for the relevant financial year.
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