Edited version of private advice

Authorisation Number: 1052414231435

Date of advice: 27 June 2025

Ruling

Subject:Commissioner's discretion - special circumstances

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1977 (ITAA 1997) to allow you to include any losses from your business in the calculation of your taxable income for the 20XX income year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a partner in a Partnership which operates a primary production business.

Your income for non-commercial loss purpose was at least $xx0,000 during the 20XX income year. You meet the assessable income, real property and other assets tests.

You state that during the 20XX income year, weather and climatic conditions affected your primary production business.

You state that the weather and climatic conditions reduced the overall profitability of the Partnership and resulted in substantial losses in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 paragraph 35-10(1)(a)

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

Income Tax Assessment Act 1997 subsection 35-10(4)

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

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

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise.

Division 35 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•                     the individual meets the income requirement, and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a)).

•                     an exception in subsection 35-10(4) applies; or

•                     the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

Commissioner's discretion - special circumstances

For those individuals who do not satisfy the income requirement in subsection 35-10(2E), the business activity must have been materially affected by special circumstances, causing it to make a loss. For these individuals, the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income years in question where but for the special circumstances,

•                     the business activity would have made a tax profit

•                     the business activity passes at least one of the four tests, and

•                     the special circumstances affecting the business activity are outside the control of the operators.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretionsets out when the Commissioner may exercise the discretion under paragraph 35-55(1)(a). The intention of the discretion was not where a 'business activity makes a loss because of factors which can apply to any business' (paragraph 10 of TR 2007/6). The discretion is for a commercial business activity that fails to satisfy any of the tests due to 'certain reasons outside the control of the operator' (paragraph 11 of TR 2007/6).

'Special circumstances' is not defined in the legislation. However, in accordance with judicial consideration, it is accepted that special circumstances are those that are unusual, different, uncommon or exceptional (paragraph 46 of TR 2007/6).

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 (paragraph 13 of TR 2007/6). Drought, floods, bushfires and other natural disasters are specifically mentioned as special circumstances.

The circumstances have to be special. As such, ordinary economic, weather or market fluctuations are not 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. However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case-by-case basis (paragraph 47 of TR 2007/6).

'Ordinary economic, weather or market fluctuations' that might usually be expected to affect the business activity would not be considered special circumstances. These would occur on a regular basis and would affect all businesses in that industry. Substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case-by-case basis (paragraph 47 of TR 2007/6). There may be circumstances where the continuing special circumstances become an ordinary or usual situation (paragraph 52 of TR 2007/6).

Paragraph 35-55(1)(a) requires consideration of whether special circumstances beyond the control of the operator of the business activity were present. This conveys the point that the circumstances cannot be a consequence of the operator's actions or inactions. It also requires consideration of whether special circumstances affected the business activity that are out of the ordinary or normal course of business. In considering whether special circumstances affected the business activity, the Commissioner will look to indicators of the effects of the special circumstances on the business activity.

It is considered that the weather and climatic conditions alone did not prevent the business from making a profit.

Although the Commissioner accepts that your business activity may have been affected by weather and climatic conditions that were outside your control, the business would not have been profitable in the 20XX income year.

Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) for the 20XX income year. As a result, you are unable to include the loss from the business activity in the calculation of your taxable income for the 20XX income year.

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