Edited version of private ruling

Authorisation Number: 1011807472365

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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 the calculation of your taxable income for the year ended 30 June 2010?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You commenced your farming activities on 2001.

For the past five years your farming activities have produced losses.

In the 2009-10 financial year, your gross income increased to almost double that of the year before but your activities still produced a loss.

You believe the current market conditions do not constitute ordinary economic or market fluctuations. These conditions include:

· the global financial crisis

· a significant increase in imports

· market control exerted by large retailers; and

· the Australian dollar at high levels affecting exports.

You estimate your activities will produce a loss in the 2010-11 financial year as well.

Your income for non-commercial loss purposes in the 2009-10 income year was above $250,000.

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 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. 

…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 have stated that your business activities were negatively affected by the global financial crisis, an increase in imports, market controls and the high Australian dollar. While these conditions were outside your control, they are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

Based on your financial figures, your activities produced almost twice as much in gross income in the 2009-10 financial year as it did in 2008-09 despite the market conditions.

The reason your farming activities did not produce a profit in the 2009-10 financial year was not due to special circumstances. 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 vineyard activities for the 2009-10 financial year.