Edited version of private ruling

Authorisation Number: 1011724083406

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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 viticulture enterprise in the calculation of your taxable income for the relevant income years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

You commenced your viticulture business activities some time ago.

Your business activities are conducted through a partnership.

The partnership owns and operates vineyards.

The partnership's intention is to generate income from the sale of grapes from the vineyards.

There are no personal use or lifestyle assets on the vineyard properties.

The partnership's net returns have been impacted by industry wide issues associated with grape oversupply.

The production volumes of the partnership have also been negatively affected by drought despite an increase in the number of vines planted.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

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 viticulture activities have been impacted by industry wide issues associated with product oversupply. The oversupply of a product is the result of ordinary market fluctuations that affects all businesses within that industry. Reduced product prices as a result of over supply might be reasonably expected to occur when carrying on a business activity and is not considered to be 'special circumstances'.

You also stated that your production volumes were negatively affected by drought. Whilst we accept that the drought conditions were not within your control, based on the figures you have supplied, even if your production levels had reached the 1,300 tonnes you anticipate in future years, the low product prices would still have prevented you from making a profit. We consider the reason your viticulture activity did not produce a profit was due to low product prices and not the drought.

Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your viticulture activities for the particular income years.

As your projected figures show that your viticulture activities will produce a profit in the other income years, the Commissioner cannot exercise the discretion for these years.