Edited version of private ruling

Authorisation Number: 1011807283728

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Ruling

Subject: Non-commercial losses - Commissioner's discretion

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 farming activity in your calculation of taxable income for the 2009-10 financial year?

Answer

Yes

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your farming activity in your calculation of taxable income for the 2010-11 financial year?

Answer

No

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling; and

· further information which we received from you.

You commenced carrying on a business of farming many years ago.

Your income for non-commercial loss purposes is more than $250,000.

You are seeking the Commissioner's discretion for special circumstances due to:

Special circumstances and their significant effect impacting the per kilo price achieved in the relevant financial years.

You made substantial profits in earlier financial years when market prices reached their peak.

Projection of the income, expenses and production figures for the 2009-10 financial year show an increase in income because of improved product recovery rates.

You state that predictions for 2011 cannot be made until closer to harvest because weather events are unpredictable but you expect a loss again in the 2010-11 financial year.

Figures for the 2009-10 financial year show an increase in income because of improved crop recovery rates. Improved weather conditions produced an improved crop.

You have not raised debt levels over the last few years and expect no further borrowings in the foreseeable future.

You state that you have demonstrated that you can make substantial profits from production where reasonable weather conditions prevail and you expect a profit from your activities if market prices continue to recover.

You anticipate that the business could return to profit, assuming the rise in the Australian dollar does not significantly lessen demand.

Reasons for decision

Summary

The Commissioner is satisfied that your activity would have made a profit in the 2009-10 financial year if it were not for special circumstances. Consequently, the Commissioner will exercise his discretion in that year.

However, the events that you have listed that impacted on your business during the 2010-11 financial year are not considered to be special circumstances for the purposes of the non-commercial losses provisions.

Therefore, the Commissioner will not exercise his discretion in the 2010-11 financial year and the loss in that year is to be deferred.

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:

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

· the exceptions apply, or

· the Commissioner exercises his discretion.

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

The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'Special circumstances' in the context of paragraph 35-55(1)(a) 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. 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.

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; and

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

2009-10 financial year

It is accepted that your business activity was affected by special circumstances outside your control in the 2009-10 financial year.

Further, having regard to your full circumstances, including that your activity has made a profit in five of the past nine financial years, the Commissioner is satisfied that your activity would have made a profit in that year if it were not for special circumstances.

Therefore, the Commissioner will exercise his discretion in the 2009-10 financial year.

2010-11 financial year

The Commissioner does not consider that fluctuations in currency rates and consequential fluctuating market prices constitute special circumstances within the meaning of paragraph 35-55(1)(a) of the ITAA 1997.

Although there may be significant price fluctuations due to currency fluctuations or market conditions it is still considered to be normal part of the cyclical nature of the industry in Australia. This is not considered to be special circumstances for the purposes of the non-commercial losses legislation.

As your business activity was not affected by special circumstances in the sense required by paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner will not exercise his discretion in the 2010-11 financial year.

Therefore, you must defer your loss in the 2010-11 financial year.