Edited version of private ruling

Authorisation Number: 1011689682598

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Ruling

Subject: Commissioner's discretion - special circumstances

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 activities in the calculation of your taxable income for 2009-10 income year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You and your spouse purchased a property with the intention of conducting a primary production enterprise.

The enterprise is conducted under a partnership structure.

You registered the enterprise business name.

You do all the work on the farm yourself.

During the 2009-10 income year you devoted four days a week to the farming enterprise and three days a week to your other occupation.

During the 2009-10 income year your farming enterprise was affected by a 'dry spell' and excess rain, as well as increases in the cost of fertilisers and transport.

You suffered a medical condition during this period that required you to 'take it easy' for some months.

You increased the time spend on your other occupation in the 2009-10 income year, earning in excess of $40,000.

The income from your farming enterprise for the 2007-08 and 2008-09 income years was less than $20,000.

Your farming enterprise has only produced a profit once.

The property on which you conduct your farming activities is valued at less than $500,000 and the value of other assets used in the activity is less than $100,000.

Reasons for decision

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for special circumstances. 

The discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised where:

· the business activity is affected by special circumstances such that it is unable to satisfy any of the tests required; and  

· the special circumstances affecting the business activity are outside the control of the business activity.  

Taxation Ruling TR 2007/6 set out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling:

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. 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 and affect all business within a particular industry.  

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. 

In your application, you have stated that your activities were unduly affected by 'a dry spell then too much rain' and the cost of fertilisers went up and transport costs doubled. What you have described would reasonably be predicted to affect your farming activities on a regular basis and, as stated above, ordinary economic, whether or market fluctuations are not considered to be special circumstances.

You also suffered a medical condition during the financial year and were advised to 'take things easy' for three months. The inability of a key person to perform their duties due to accident or illness can be considered a special circumstance. During the period you were unable to carry out your farming duties, you took extra work in your other occupation. As a result, your income from an external source exceeded $40,000, therefore, denying you access to the exception contained in subsection 35-10(4) of the ITAA 1997 that would allow you to apply your farming losses against your other income.

TR 2007/6 states that in situations where a business activity would have failed to satisfy a test even if the special circumstances had not occurred, the Commissioner would be unlikely to exercise the discretion (paragraph 50). In your case, the income and expenditure figures you have provided for the 2007-08 and 2008-09 income years show that your farming activities failed to satisfy any tests in these years. There is nothing to suggest that you would have satisfied any of the tests in the 2009-10 income year even if you had not suffered from the medical condition.

Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to offset the losses made from your farming activities against your other assessable income for purposes of calculating your taxable income for the 2009-10 income year.