Edited version of private ruling

Authorisation Number: 1011807946506

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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 primary production enterprise in your calculation of 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

You commenced your primary production activities in 1996.

In the 2009-10 financial year, your activities were affected by extreme weather events which reduced your product yields.

These weather events include:

· drought which caused approximately 0.7% of your crop to die

· frost and heavy rain reduced your remaining crop by another 69%.

You have stated that this loss in production equates to almost $110,000 in lost production.

You have also stated that a more than 3% reduction in customer numbers is as a result of the global financial crisis.

Your losses in the 2009-10 financial year were almost $250,000.

Your income for non-commercial loss purposes in the 2009-10 financial 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 production volumes and, ultimately, your assessable income, were negatively affected by drought, frosts and heavy rains in the 2009-10 financial year. It is accepted that these conditions were outside your control and, therefore, are '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.

You have stated that these weather events reduced your yield and your assessable income by over $100,000. Your overall loss in the 2009-10 financial year was nearly $250,000. Based on these figures, had the weather events not occurred, your primary production activities would still have returned a loss of around $140,000.

You have also stated that the there had been a reduction in customer numbers in the 2009-10 financial year which you assume is as a result of the global financial crisis. Ordinary economic or market fluctuations can affect any business activity and would not generally be considered special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. According to your figures, your customer numbers for the 2009-10 financial year dropped by more than 3% in comparison to the previous year. A more than 3% increase in your sales for the 2009-10 financial year would equate to less than $24,000 and, based on these figures, your activities would still have returned a loss even without the downturn in customer numbers.

The reason your primary production activities did not produce a profit was more a result of your high expenditure levels than the affects of the weather.

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 primary production activities for the 2009-10 financial year.