Edited version of private ruling

Authorisation Number: 1011807442918

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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 farming activities in your calculation of taxable income for the 2010-11 and 2011-12 financial years?

Answer: Yes.

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You commenced cropping farming activities in 2009.

Heavy unseasonal rainfall affected your 2010-11 harvest and reduced your final crop.

Further extreme weather events have also affected the growth of your crop due to be harvested in the 2011-12 financial year.

You have provided a report from an industry body explaining the affects of the extreme weather on the 2010-11 and 2011-12 harvests.

You now expect to produce a profit in the 2012-13 financial year.

Your income for non-commercial loss purposes in the 2010-11 financial year will be above $250,000 and you expect this will be the case for the 2011-12 financial year as well.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

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

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

Reasons for decision

Section 35-1 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 his discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity.

You have stated that your farming property experienced unseasonal heavy rains just prior to the 2010-11 harvest which reduced your final crop. Further extreme weather events have also affected the growth of your crop due to be harvested in the 2011-12 financial year.

These weather conditions were outside your control and, therefore, are accepted as 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss.

Your farming activities have never made a tax profit as you only commenced in the 2008-09 financial year and 2010-11 was to be your first harvest. However, had it not been for the extreme weather events, there was a real expectation that your farming activities would have produced a profit.

The Commissioner is satisfied that special circumstances will cause your farming activities to make a loss in the 2010-11 and 2011-12 financial years. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 and 2011-12 financial years.