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Edited version of private ruling
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Ruling
Subject: Non-Commercial Losses Special Circumstances
Question
Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your business in the calculation of your taxable income for the 2009-10 and 2010-11 financial years?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commenced on
1 July 2009
Relevant facts
You have been conducting your primary production business on a large property for more than XX years.
You are presently carrying less stock than normal due to drought.
Your property recently received drought breaking rain.
You will now enter into a stock re-building period; therefore you believe that it will take until the 2011-12 financial year to restore the property to profitability.
You have made losses from your business in XX of the past XX financial years. During the last XX years there have been several years of above average rain.
You do not meet the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.
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 Paragraph 35-55(1)(a)
Summary
The special circumstances discretion can only be exercised for the 2009-10 and 2010-11 financial years if the Commissioner is satisfied that your activity would have made a profit in those years if it were not for the drought.
Your activity has made a loss in XX of the past XX financial years. Bureau of Meteorology annual rainfall figures for the same period show that the area your property is situated received above average rainfall in several of those years. That is, your activity has made losses even in periods of above average rainfall.
Therefore, the Commissioner cannot be satisfied that your activity would certainly have made a profit if it were not for the drought. Consequently, the Commissioner is unable to exercise the discretion in relation to your activity.
Detailed reasoning
From the 2009-10 income year, section 35-10 of the ITAA 1997 provides that an income requirement must be met (along with certain other 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 a discretion to allow the inclusion of the losses in certain circumstances.
The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not meet the income requirement. Therefore, your losses from your business activity must be deferred unless a discretion is exercised.
The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred.
For those individuals who do not meet the <$250,000 income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year.
Special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.
It is accepted in your case that the drought constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances.
Your business activity has only made a profit in one of the past XX financial years. However, data from the Bureau of Meteorology show that your property received above average rainfall in several of those years. That is, your activity has made losses even in periods of above average rainfall.
Therefore, the Commissioner cannot be satisfied that if it were not for the drought, your activity would clearly have made a profit in the 2009-10 and 2010-11 financial years. Consequently, the discretion will not be exercised.