Edited version of private ruling

Authorisation Number: 1011593816255

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Ruling

Subject: NCL - Commissioner's discretion - special circumstances

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 non-primary production activity in your calculation of taxable income for the years ended 30 June 2010 and 2011?

No.

This ruling applies for the period:

1 July 2009 to 30 June 2011

The scheme commenced on:

1 July 2009

Relevant facts

You started operating a non-primary production activity in the year ended 30 June 2008. You commenced the activity on the expectation that certain conditions will be fulfilled and you will be able to operate the activity at full scale. However, the conditions are not fulfilled and your activity is not fully operational. This has limited the turnover of your business activity and affected the profitability. You expect the conditions will be satisfied in the future and your activity will be fully operational.

You have provided profit and loss statements for the past years showing that the activity had tax losses.

You expect your non-primary production activity will make a tax profit for the income year ending 30 June 2012 subject to your ability to satisfy conditions imposed by government requirements.

In a telephone discussion you stated that a third party assured you that the conditions will be satisfied. However, no documentary evidence was available. You state that income from your activity would be a specified percentage more than the income actually received, if the conditions were satisfied.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-55

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

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

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 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, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· 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.

As your activity is not a primary production business activity or a professional arts business activity, the exception in subsection 35-10(4) of the ITAA 1997, has no relevance for the purpose of this ruling.

In broad terms, the tests require:

(a) at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)

(b) the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

(c) at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or

(d) at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

In the context of section 35-35 of the ITAA 1997 ((b) above), a 'taxation profit' for the income year in question is where the amount of assessable income from the business activity for that year, is greater than the sum of the deductions attributable to it for that year (apart from the operation of subsection 35-10(2) of the ITAA 1997).

You satisfy income requirement in subsection 35-10(2E) of the ITAA 1997 if the sum of the following is less than $250,000:

· your taxable income for that year

· your reportable fringe benefits total for that year

· your reportable superannuation contributions for that year

· your total net investment losses for that year.

For the purposes of paragraph (a) above, tax losses for any business activity that could otherwise be deductible must be disregarded.

Information you have provided in your tax returns shows that you have not satisfied the income requirement. Therefore, the loss from your activity will not be taken into account in the relevant years unless the Commissioner will exercise his discretion in section 35-55 of the ITAA 1997.

To apply the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity is affected by the special circumstances in those years.

Your non-primary production activity will only be potentially subject to the provisions in Division 35 of the ITAA 1997, if it is carried on as a business. If your activity is not carried on as a business, then you cannot claim general deductions in relation to it. You state that your activity is carried on as a business and this ruling is made on the basis of accepting it.

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of the Commissioner's discretion as follows:

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a *business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

Note:This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

The concept of 'control' was discussed in Secretary, Department of Employment, Education and Youth Affairs v. Ferguson (1997) 76 FCR 426; (1997) 48 ALD 593; (1997) 147 ALR 295 for the purposes of subsection 45(6) of the Employment Services Act 1994. At 76 FCR 438; 48 ALD 603; 147 ALR 306, Mansfield J said:

The expression in s45(6)(a) requires that the main reason for the failure was something that the person had within that person's control. The concept of 'control' in that context is one of fact, but I think it is intended to mean something which the person could have done something about.

And at 76 FCR 438, 48 ALD 603; 147 ALR 306:

It recognises the focus of the expression upon occurrences which the person concerned could not realistically prevent.

Paragraph 58 of Taxation Ruling TR 2007/6 reads:

Similarly, the acquisition of a poorly run but promising business activity would generally be considered to be within the control of the business operator and as such would not, by itself, constitute special circumstances, even though the actions of the former operator may have been outside the control of the current operator.

Tamberlin J 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.

In your case before you commenced your activity, you were aware of the conditions. You were also aware that if you do not satisfy the conditions attached, you will not be able to operate your activity at full scale. It was your decision to commence the business activity while the conditions were still not satisfied. Therefore, it is not accepted that there was nothing you could have done to avoid the circumstances.

We consider that the decision to commence your activity under the circumstances was within your control. Furthermore, such circumstances are not accepted as unusual, uncommon or exceptional to be described as special. We consider that you have taken a business risk. You were aware that there was a possibility that conditions would not be satisfied and as a result the activity would not be fully operational.

The difficulties experienced are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997 as the Commissioner cannot be satisfied that the circumstance was out of your control.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years ended 30 June 2010 and 2011 on the basis that it is not accepted that the circumstances are special circumstances in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

The rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any losses that arise from your non-primary production activity for those years. A deferred loss is not disallowed and will be deductible against any taxation profit from your activity, or similar business activity in the future years.