Edited version of private ruling

Authorisation Number: 1011701740499

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Ruling

Subject: non-commercial losses - 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 viticulture activities in your calculation of taxable income for the income year ended 30 June 2010?

No.

This ruling applies for the following period

For year ended 30 June 2010

The scheme commenced on

1 July 2007

Relevant facts

Your other income for non-commercial losses purposes in the year is in excess of $250,000.

You are involved in a vineyard business. A loss has been incurred in year for this activity.

The loss can be attributed to three different reasons:

The first reason is because frost and water conservation equipment was installed on the block in a previous year. The year is the final year of the claim. In the first year of the claim the partnership made a profit.

The second reason is because a few acres of low price grapes have been grafted to more, in demand varieties and they are expected to come into full production in a future year.

The third reason is the grape prices have been unreasonably low for a couple of years for all varieties of grapes, but all indications and projections by the industry is that prices for quality grapes will steadily increase.

Relevant legislative provisions

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

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

Reasons for decision

Summary

The events that you have listed, that impacted on your business during the income year are not considered to be special circumstances for the purposes of the non-commercial losses provisions.

As your business activity was not affected by special circumstances in the sense required by paragraph 35-55(1)(a), the Commissioner is therefore not satisfied that it would be unreasonable to apply the rule in section 35-10 in relation to your business activity for the income year. The loss is to be deferred to a later year where it can be offset against assessable income from the same activity, or a similar activity.

Detailed reasoning

You have applied for the Commissioner's discretion - special circumstances, with regard to your losses for the income year, as your other income is in excess of $250,000 and you do not have access to the assessable income test, profits test, real property test or the other assets test. Also, the exception for primary producers does not apply as your other income exceeds $40,000.

Commissioner's discretion - special circumstances

Section 35-55 provides that the Commissioner can decide that section 35-10 does not apply where he is satisfied that it is unreasonable for it to apply.

Paragraph 35-55(1)(a) provides that the Commissioner can exercise the discretion where certain special circumstances apply.

Paragraph 35-55(1)(a) refers to 'special circumstances' outside of the control of the operators of the business activity, including drought, bushfire and other natural disasters. However the list is not meant to be exhaustive. There are a range of other circumstances which may be considered as special.

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.'

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.

The operators of the business activity must show that the special circumstances were outside their control. 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 47 of Taxation Ruling TR 2007/6 explains that to qualify as special circumstances the circumstances must go beyond the normal or expected fluctuations in business, weather or market conditions. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity as well as trading downs and risks associated with running a business will not be considered to be special circumstances.

In your case, you have attributed the loss to three different reasons.

1. The write-off of the frost and water conservation equipment installed on the block.

The need for the installation of this type of equipment would be seen as a normal part of the process of growing grapes. The fact that the expense can be written off over a period of three years, which increases expenses for these years is not considered to be special circumstances. It is not something that is unusual or out of the ordinary. The large deduction is obviously going to impact on the potential for the activity to make a tax profit in that year, but it is not considered to be special circumstances in terms of the Commissioner's discretion. You have indicated that you were able to make a profit in a previous year, the first year of the claim.

2. A few acres of low priced grapes have been grafted to more, in demand varieties.

This change of variety for a portion of the vineyard would be seen as part of the long term management of the activity to meet changing demand for product. It is seen as part of the management process of the activity, as the demand for certain varieties of grapes fluctuates over a period of time. The impact of the reduced production due to this would not be seen as special circumstances. It is not similar to a reduction that is caused by floods or bushfires.

3. Grape prices have been unreasonably low for a couple of years for all varieties.

Whilst we accept that the fluctuations in market prices are not within your control we consider them to be a normal part of the viticulture industry, it is not something unexpected.

The oversupply and subsequent price fluctuation for grapes have historically been part of the viticulture industry in Australia. For example, in 1986 vine growers were paid a subsidy under the Vine Pull Assistance Scheme by the Federal Government to pull out grape vines and not to replant for a period of at least 5 years. Taxation Ruling IT 2302 dealt with the assessability of payments under the scheme. Although the ruling has been withdrawn it is relevant when considering the history of supply within the industry. Specifically paragraph 3 of the ruling states:

In essence, the purpose of the vine pull assistance is to encourage uneconomic wine grape growers who wish to leave the industry to do so and, thereby, to reduce surplus grape production.

Industry information indicates that in the early 1990's the market price for grapes doubled which consequently lead to a 50% increase in vineyard plantings across Australia. For example, in the period from January 1999 to June 2001 there were product rulings issued for some 70 viticulture projects. We consider that the oversupply of grapes and subsequent fall in market prices when the vines from the increased plantings matured, was a possible foreseeable result.

Although there has been a significant price fluctuation it is still considered to be normal part of the cyclical nature of the viticulture industry in Australia. This is not considered to be special circumstances for the purposes of the non-commercial losses legislation.