Edited version of private ruling

Authorisation Number: 1011710826297

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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 primary production activity in your calculation of taxable income for the relevant income years?

Answer

Yes

This ruling applies for the following period

1 July 2009 to 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

Around twenty years ago you commenced a primary production activity. Some years later, as this property was not suitable for the activity, you purchased another property and continued the business. This business is conducted by you as a sole trader employing other staff.

Initially you conducted two primary production activities. Subsequently due to the impact of unfavourable circumstances you decided not to continue the first activity. At the same time due to the benefits of the higher prices received for the products of the second activity, you decided to concentrate on the second activity.

To overcome some of the difficulties in obtaining original stock you decided to produce your own stock to target the export market. You used various methods to increase your trading stock. As you have managed to generate sufficient stock to continue the activity you have now discontinued one of the methods you used to increase the trading stock. You state that this will substantially reduce costs over the next couple of years.

To conduct the above program effectively, you needed to re-locate the activity and as a result you purchased properties in Western New South Wales (NSW) (property No. 1) and Southern NSW (property No 2).

Property No 1 is used for various primary production activities including increasing your trading stock using non-artificial methods. You state that unavoidable circumstances affected this property significantly.

The second property (property No 2), is used to increase your trading stock artificially and to show the product to overseas customers as the property is always in good condition.

You sell your product to different markets at different times.

You state that the unavoidable circumstances experienced in NSW over the past years had significantly impacted on your primary production activity. You have worked hard to maintain the condition of your trading stock using various methods, however, these methods are generally useful to restricted areas. As your property is large it is not possible for you to transport the necessities over an extensive area as it is time consuming and expensive.

The impact of the unavoidable circumstances has been substantial and has severely affected your activity in every aspect.

You have provided values to demonstrate the impact of the unavoidable circumstances in terms of the various activities you carry out.

The information available in web sites confirms that the areas you are conducting the primary production activity was affected by unavoidable circumstances.

You have provided information with regards to the activities you are conducting, the income and expense statements from the commencement of the activity and estimates for the years you are requesting the private ruling.

You have stated that if unavoidable circumstances did not prevent the increase in your trading stock, the business would have been profitable in the income years.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) and 35-55(1)(c) of the ITAA 1997 for the income years.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 section 35-30

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

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, go to our website 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.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain tests) in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

In your case you do not expect to satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 in the income years.

Your primary production activity will only be potentially subject to these provisions if it is carried on as a business. You have stated that your primary production activity is carried on as a business and this ruling is made on the basis of accepting this claim.

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), as the Note to the paragraph indicates.

For the income year, although you satisfied the assessable income test in section 35-30 of the ITAA 1997, you did not receive a profit. For the income year you expect to satisfy the assessable income test in section 35-30 of the ITAA 1997, however you do not expect to generate a profit.

You have stated that the unavoidable circumstances commenced during the early stages of the primary production activity. The information available in the relevant websites confirms that the areas you are conducting the activity was affected by the unavoidable circumstances for the past eight years.

The Commissioner accepts that your activity would have returned profits in the income years had it not been for the unavoidable 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 income years. This means that any loss from your activity for those years can be taken into account in calculating your taxable income.

You have stated that the primary production activity is expected to generate profits in the future year.

Accordingly, it would not be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your primary production activity for the income years.

In view of the above, the Commissioner's discretion in paragraph 35-55(1)(a) is exercised and you are entitled to claim the losses incurred in the income years in the years the expenses are incurred.

Note

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) that the loss deferral rule in subsection 35-10(2) does not apply to you for the income years in question. That decision can only be made in issuing you your assessments, following lodgement of your income tax returns for the relevant income years, being that for the income years. You can lodge these returns 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 primary production activity for the income years 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 generate a profit.