Edited version of private ruling

Authorisation Number: 1011510964516

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Ruling

Subject: Non-Commercial Losses Special Circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your crop growing activities in the calculation of your taxable income for the 2009-10 income year?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2010

Relevant facts

You operate a crop growing business.

The farm is surrounded by rainforest country where there are lots of fungi in the soil.

The crop requires a special temperature to provide flowers. Data supplied from the Australian Bureau of Meteorology shows the monthly mean temperatures for your area during the flowering season for the year in question and several prior years varied between X° and Y° Celsius. You believe the temperature has differed on your farm because of the nearby rainforest country.

Fungus

You were aware when purchasing the bulbs that fungus could potentially affect flower production.

You were advised by the bulb supplier to use a chemical to combat the possibility of fungal attack. You used the chemical before planting and for a number of weeks after the bulbs flowered.

It became obvious that the chemical was not fully controlling the fungus and flower production began dropping. The whole crop was affected in some way. Production decreased to almost nothing when you dug out all the bulbs and replanted, rejecting more than X% of the original number due to the fungal attack.

You liaised with the bulb supplier regarding the problem. They suggested various options including soil tests, stricter culling of affected bulbs, more chemical use and avoiding "wet feet" of the bulbs. You initially did soil testing. You also took steps to alleviate the effects of the fungal attack including spraying better chemicals and planting the bulbs in raised beds to avoid moisture.

Before the activity commenced, the surrounding rainforest was identified as a potential source of fungus. It was recognised then that additional treatment was required before the activity commenced. Chemical spraying was conducted in the bulb beds, in adjacent areas and potential new beds.

Your income from sources not related to your primary production activities was more than $40,000 in the 2009-10 income year.

Reasons for decision

Division 35 of the ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred. The loss must be deferred.

The deferred losses may be offset in later years against profits from the activity. The losses may also be offset against other income if the income requirement and one of the tests is satisfied, the exception applies, or if the Commissioner exercises a discretion (special circumstances or lead time).

Exception

Where a loss is from a primary production business activity or a professional arts business activity and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain) you will be excepted to offset those losses against other income (i.e. there is no requirement to defer the losses).

The exception does not apply to you as you earned over $40,000 from sources not related to the crop growing business in the 2009-10 income year.

Are you carrying on a business?

Your activities will only be subject to these provisions if it is carried on as a business. You stated in your private ruling application that your activity was carried on as a business. This ruling is made on the basis of accepting this claim.

Special Circumstances

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the Commissioner's discretion in regards to special circumstances. If the Commissioner is satisfied that the business activity was, or will be, affected in that, or those, income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster there will be no requirement to defer the losses in that year. A note to the paragraph states an activity would have satisfied one of the tests if it were not for the special circumstances.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J. considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course…

Later, 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 are '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), as the Note to the paragraph indicates.

In Taxation Ruling TR 2001/14, the Commissioner provides guidance to taxpayers in what he considers to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Apart from drought, flood and bushfire which are specifically mentioned in the legislation, it may also include:

- earthquakes

- diseases affecting livestock or crops

- pest plagues, or

- hailstorms.

In Taxation Ruling TR 2007/6, the Commissioner expands on his view of what would constitute 'special circumstances' in the context of paragraph 35-55(1)(a) of the ITAA 1997, to include:

- an oil spill

- a chemical spray drift

- a gas plant explosion

- a power plant shutdown

- a water authority malfunction

- government authority restriction imposed on land use, or

- other events (for example, illness of the operator or employee(s)) which have significantly affected the ability of the operator to carry on the business activity.

You have stated that there are two circumstances which have potentially affected the output of your crop. Both of those circumstances will now be addressed:

Weather

You have stated that the bulbs require a special temperature during flowering season. You also supplied monthly mean minimum temperatures which were supplied by the Australian Bureau of Meteorology. It appears that the temperature readings during the flowering months of the year in question and the prior years varied however it remained constant. From the information supplied it appears that the temperature during the flowering months for the year in question and the prior years did not rise above what was considered normal. This indicates that the temperature was within the ideal temperature for the crop.

You also stated that the property is surrounded by rainforest country and you believe that this kept the temperature up a bit on your property. The possibility of local temperatures being slightly higher than expected due to the surrounding rainforest should have been foreseen before commencing the activity. If the temperature was slightly higher, this should have been expected and not an unusual occurrence. We do not believe that the weather conditions were unusual and therefore do not constitute special circumstances.

Diseases

You stated that you were aware that fungus could affect production when you purchased the bulbs from the supplier. You were advised to use chemicals to combat the possibility of fungal attack. You used a chemical before planting and for a number of weeks after the bulbs flowered. It became obvious to you that the chemical was not fully controlling the fungal attack and the production of flowers decreased. In a later year, production of flowers was reduced to almost nil. You then dug up all the bulbs and replanted, rejecting a percentage of the original bulbs due to the fungal attack.

You were aware of the possibility of fungal attack when purchasing the bulbs. You did however, take steps to prevent the possibility of the fungal attack occurring. The possibility of fungal attack is a widely accepted part of growing this crop. We do not believe that the fungal attack was an unusual occurrence as you were aware of the possibility of a fungal attack before you planted the bulbs.

When you initially approached the supplier for advice on how to address the low flower production, part of that advice was to avoid the bulbs getting "wet feet". You obviously agreed with this advice as you planted bulbs in raised beds to avoid moisture. This problem may have contributed to low flower production. There is nothing unusual in raising the beds so as to avoid the bulbs getting "wet feet".

We believe neither the weather conditions nor the fungal attack were special circumstances. The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. You are required to defer your losses in the 2009-10 income year.