Edited version of private ruling

Authorisation Number: 1011792285550

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Ruling

Subject: non-commercial losses

Question 1

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 the 2009-10 financial year?

Answer: No

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activities in the calculation of your taxable income for the 2009-10 financial year?

Answer: No

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You initially acquired X00 acres in 200X for cattle farming. The purchase of the land included a number of cattle.

A further XXX acres of land was purchased and YYY acres leased. Total peak land use was around ZZZZ.

You have invested significant capital in establishing the business.

The properties purchased contain houses which are rented to supplement farm income.

The increased maturity of the business is reflected in the sales for the six months to December 31 2010.

Your taxable income included a capital gain, generated from the sale of investments. The proceeds released from the asset sales were used to reduce debt associated with the business activities.

Your income for non-commercial loss purposes for the 2009-10 financial year exceeds $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-10(2).

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

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

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

Reasons for decision

Summary

The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 (special circumstances) to allow you to include any losses from your business activity of cattle farming in your calculation of taxable income for the 2009-10 income year. There are no special circumstances that have affected your business activity.

We accept that you are carrying on a business activity and expanding your cattle breeding activities however, you have not provided objective evidence of the commercially viable period to make a tax profit. The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

Detailed reasoning

For the 2009-10 and later income years, division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless (relevant to this division):

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

Special circumstances

'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, including drought, flood, bushfire or some other natural disaster.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

The question of what constitutes 'special circumstances' has been judicially considered. 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 ircumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

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.

There is no discretion in the legislation to allow you to exclude a one-off capital receipt to enable you to pass the income requirement. In terms of paragraph 35-55(1)(a) of the ITAA, there are no special circumstances outside of your control that have affected your business activity in the 2009-10 year. There is no scope to allow the Commissioner's discretion under the special circumstances limb in section 35-55 of the ITAA 1997.

Commercially viable period

You have not provided objective evidence of the commercially viable period for your cattle farming activities to make a tax profit. However it is considered that the commercially viable period for the cattle farming industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached a saleable age. You have indicated that you have been in the business of cattle farming since 200X.

We accept that you are carrying on a business activity and expanding your cattle breeding activities however, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

Based on the information you have provided there are no other discretions, exemptions or exclusions that apply to your situation. The business loss for the 2009-10 year is required to be deferred.