Edited version of private ruling

Authorisation Number: 1011663213920

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Ruling

Subject: non-commercial losses Commissioner's discretion

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 primary production activity in your calculation of taxable income for the 2009-10 to 2012-13 income years?

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2000

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling

· a letter from your tax agent

· non-commercial losses evidentiary checklist

· capital expenditure report

· actual and projected profit and loss statements for 2008 to 2014

· production schedules for 2010 to 2014

· yield projections for 2010 to 2014.

You do not satisfy the subsection 35-10(2E) of the ITAA 1997 income requirement test.

You purchase a property. You invested substantially to purchase the property, prepare the land for a vineyard, stock vines and construct a tasting room. The property is X acres of which less than Y acres are under cultivation. You anticipated that the business would he profitable within five years, which is in accordance with industry standards. You now anticipate a profit will be returned in the 2013-14 financial year.

You did not claim expenses related to the business for the financial years from 2000-01 to 2004-05. In 2006, following the licensing of the vineyard you were deemed to be carrying on a business and accordingly income and expenses relating to the business were returned in your income tax return for 2006 and ensuing years. In the 2006-07 and 2007-08 financial years the sales reflect a yield above the average yield for the acreage under cultivation. This is a result of production accumulated during the years 2004, 2005 and 2006, prior to the licensing of the vineyard.

The buildings on the property relate solely to the production of business income, being farm buildings, cellar and bottling facilities and a tasting room. There is no residence on the property.

Due to a glut of wine you reduced the sale prices in 2008 to 2010 in an attempt to move stock. The global financial crisis also impacted on your business as customers were reluctant to purchase luxury non-essential items such as wine.

Reasons for decision

Division 35 of the ITAA 1997 applies to prevent losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred.

Under the measures the losses that cannot be offset against other income in the year in which they arise may be carried forward to be offset in a future year when there is a profit from the non-commercial activity (or against other income if certain criteria are satisfied or the Commissioner exercises his discretion).

You have asked for the Commissioner's discretion to be applied to your circumstances.

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

The Commissioner may decide that the rule in section 35-10 does not apply to a business activity for one or more income 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 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;

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.

No exhaustive definition of 'special circumstances' is given.

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.

In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. TR 2007/6 states at paragraph 47:

ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

You advise your activities have been affected by the wine glut. It is considered that an oversupply of a product is the result of ordinary market fluctuations that affects all businesses within that industry, and is a circumstance that might be reasonably expected to occur when carrying on a business activity. Also, whilst we accept that the global financial crisis was not within your control, we consider the fluctuations to be a normal part of the share market and financial industry.

The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 (special circumstances) to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2012-13 financial years. There are no special circumstances that have affected your business activity in the 2010 year which would allow the non-deferral of losses for the 2009-10 to 2012-13 financial years.