Edited version of private ruling

Authorisation Number: 1011491835834

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Ruling

Subject: Non commercial losses

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 business activity in your calculation of taxable income for the 2009-10 income year?

Answer

No.

This ruling applies for the following period<s>:

1 July 2009 to 30 June 2010

Relevant facts and circumstances

The following description of the scheme is based on information provided by you. The following documents form part of the scheme under consideration:

- Your Private Ruling application

- Your business plan

- Your business activities income and expenditure projections

You are carrying on your business on a number of properties and the full irrigation potential is yet to be realised.

You have stated that you have purchased the new equipment which will incur the investment allowance and in addition the following factors have impacted the property from operating profitably in 2009-10 income year:

- No lease income as in previous years

- The low price of stock coupled with a reduced yield

- Capital expenditure on irrigation

- Lower profit margin and less stock

You purchased additional property during and incurred borrowing and set up costs.

Your income for non commercial loss purposes for the 2009-10 income year will be more than $250,000.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 income year.

Your business activity will become profitable in its own right in 2010-11 income year.

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.

In your case, you do not meet the income requirement as your income for non commercial loss purposes is above $250,000.

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

You state that your activity is carried on as a business and this ruling is made on the basis of accepting this claim. As your business activity has commenced, and has been carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997.

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. 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.

To determine what is 'special circumstances', we need to look at the context in which the phrase is used. Also, it is clear that 'special circumstances' will be something out of the ordinary or unusual. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. For this to be the case, it will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has resulted in the business activity failing to pass a test. Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by 'special circumstances' in the sense in which this term is used in paragraph 35-55(1)(a) Of the iTAA1997, as the Note to the paragraph indicates.

You have stated that the activity commenced in 200X and you later bought additional property. You claim that the special circumstances that caused your activity not to meet one of the tests, as described above, were:

- No lease income as in previous years

- The low price of stock coupled with a reduced yield

- Capital expenditure on irrigation

- Lower profit margin and less stock, any

- You purchased additional property on which you incurred borrowing and set up costs.

The Commissioner does not accept that these circumstances are 'special' in the sense required by law because they are not something sufficiently out of the ordinary or normal course of business. In fact the expenditure is considered to have been expended on normal running costs that are associated with the business involved.

Even if the circumstances could be considered to be 'special' in the relevant sense, (which is not accepted) the Commissioner does not accept that they were 'outside the control of the operators'. In a legal and practical sense, the conduct of the business activity remained within your control, and you had the power to make decisions. You also had the ability to consider other options.

As your business activity was not affected by 'special circumstances' in the sense required by paragraph 35-55 (1)(a) of the ITAA 1997 in the 2009-10 income year, the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 and the losses from your business activity for the 2009-10 income year will need to be deferred in accordance with section 35-10 of the ITAA 1997.