Edited version of private ruling

Authorisation Number: 1011672116954

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Ruling

Subject: Non Commercial Losses- 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 form your business activity in your calculation of taxable income for the relevant income year?

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced in

1 July 2009

Relevant facts and circumstances

You are carrying on a primary production business activity in partnership.

During the relevant income year due to unavoidable circumstances you were not able to conduct the business activity.

The unavoidable circumstances first affected you in a prior income year. You were unable to conduct your normal business activities. Your business partner carried on the activity to the best of their ability. However, the partnership did not manage to satisfy the assessable income test in the relevant income year.

During the relevant income year you received income from other sources.

Prior to the business activity being affected by unavoidable circumstances, you have satisfied one of the tests in Division 35 of the ITAA 1997 and have generated profits.

As your circumstances are now improving you expect to satisfy one of the tests in Division 35 of the ITAA in the next income year.

You have provided details of the income you received from the primary production activity for the relevant income years and independent evidence with regards to the unavoidable circumstance.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to claim the losses incurred in the relevant income year.

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 section 35-30

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

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

Income Tax Assessment Act 1997 subsection 35-10(4)

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 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, 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.

Your activity will only be potentially subject to these provisions if it is carried on as a business.

You state that your activity was carried on as a business and this ruling is made on the basis of accepting this claim. You have also satisfied the income requirement in subsection 35-10(4) of the ITAA 1997.

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.

The Note to paragraph 35-55(1)(a) of the ITAA 1997 states that the particular 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 above paragraph refers to 'special circumstances' outside 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.

It can be seen that to determine what is '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) of the ITAA 1997, as the Note to the paragraph indicates.

Although you received assessable income from the activity for the relevant income year, your activity did not pass any of the tests in Division 35 of the ITAA 1997.

Independent evidence provided by you confirmed that a special circumstance affected your income producing activity.

Paragraph 13 of the Taxation Ruling TR 2007/6 reads:

Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35.

Paragraph 54 of TR 2007/6 provides examples of circumstances which the Commissioner considers would constitute a 'special' circumstance. Your circumstance is included in the list.

The unavoidable circumstance was unusual and beyond your control. Information you have provided and supported by independent evidence shows that the unavoidable circumstance adversely affected your activity causing you to reduce the activities in the relevant income year. The Commissioner accepts that the circumstance that affected your activity is 'special circumstance' as these terms are used in paragraph 35-55(1)(a) of the ITAA 1997.

In previous years you have satisfied the assessable income test in section 35-30 of the ITAA 1997 and have generated profits.

The Commissioner accepts that your activity would have returned sufficient income and passed the assessable income test for the relevant income year had it not been for the special circumstances.

In view of the above, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 and therefore, the rule in subsection 35-10(2) of the ITAA 1997 will not apply to your business activity for the relevant income year. This means that any loss from your activity for that year can be taken into account in calculating your taxable income.

Note

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the income year in question. That decision can only be made in issuing you your assessment, following lodgement of your income tax return for this income year, being that for the income year ending 30 June 2010. You can lodge this return on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

Summary of reasons for decision

The Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 in relation to your activity for the relevant income year on the basis that, from the evidence you have supplied:

· your activity was carried on by you as a business, and

· it is because of a special circumstance outside your control that the business activity did not satisfy the assessable income test in section 35-30 of the ITAA 1997.