Edited version of private ruling

Authorisation Number: 1011491895414

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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

The scheme commences on:

1 September 1985

Relevant facts

You have established a farm.

You received a payment from your former employer. Since then your only income has been rental income and income from the sales.

You have used this payment to reduce your debt and as a result, the business is expected to be profitable within a few years.

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

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.

You state that your activity is carried on as a business and this ruling is made on the basis of accepting this claim.

As the business activity will not produce assessable income greater than the deductions attributable to it for 2009-10 income years, you have applied for the Commissioner's discretion to be applied in terms of paragraph 35-55(1) (a) 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 'special circumstances' is, 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 you received a payment from your employer and have used part of this payment to reduce the debt in relation to your business activity. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1) (a) of the ITAA 1997. The special circumstances must be outside the control of the operators of the business activity in terms of paragraph 14 of Taxation Ruling TR 2007/6. Such circumstances are specifically defined to include drought, flood, bushfire or some other natural disaster.

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.