Edited version of private ruling

Authorisation Number: 1011509790195

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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 income years?

Answer

Yes. The Commissioner will 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 income years.

The Commissioner will not exercise the discretion in paragraph 35-55(1) (b) 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 income year as you will pass the assessable income test in that year.

This ruling applies for the following period

1 July 2006 to 30 June 2010

The scheme commenced on

1 July 2002

Relevant facts

You have owned your business for some time.

You have provided information in respect to the drought. You have sent in the statistics from the Department of Primary Industries, that shows the annual rainfalls and have also sent in an extract from the Bureau of Meteorology.

You have also mentioned that it takes about seven years for your particular business to flourish but the drought has hindered the production considerably.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-55.

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

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the exception in subsection 35-10(4) of the ITAA 1997 applies

· one of the four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Generally, a loss in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

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 '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) ITAA 1997, as the Note to the paragraph indicates.

The information you have provided demonstrates that there is a reasonable expectation that your business activity would have satisfied one of the tests, had it not been for the drought. 

The drought significantly affected your business operations in the income years. You have sent in the statistics from the Department of Primary Industries, that shows the annual rainfalls and have also sent in an extract from the Bureau of Meteorology.

It is accepted that the drought prevented the business activity from passing the assessable income test in section 35-30 of the ITAA 1997 in the income years and was sufficiently unusual to constitute special circumstances which were outside the control of the operators of the business activity. 

The information you have provided demonstrates that there is an objective expectation that your business activity will pass one of the tests (the assessable income test) by the relevant income year.

Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 has been granted for the income years.