Edited version of private ruling

Authorisation Number: 1011844971432

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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 2009-10 and 2010-11 financial years?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You carry on a business of farming activities.

Extreme heat in the 2009-10 financial year, just prior to harvesting, caused your crops to shrivel, reducing the quality and value of the crops. As a result, the anticipated cropping income was reduced by almost $XXX.

The extreme heat also affected the fodder reserves kept for livestock, which reduced carrying capacity and potential livestock income.

Your business losses for the 2009-10 financial year totalled approximately $XXX.

Heavy rain and flooding in the 2010-11 financial year damaged crops and reduced potential proceeds by almost $XXX. It also increased livestock costs.

Your business losses for the 2010-11 financial year are expected to total around $XXX.

You expect your activities to return to profit in the 2011-12 financial year.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this will be the case for the 2010-11 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 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 in the 2009-10 financial year and you expect this will be the case in the 2010-11 financial year as well.

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.

In your case, your farming activities were affected by un-seasonally high temperatures in the 2009-10 financial year and heavy rain and flooding in the 2010-11 financial year. It is accept 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.

Your farming activities have been unprofitable for many years. However, this can be attributed, at least in part, to the prolonged drought conditions affecting the region where your farm is situated. In the 2009-10 financial year, your cropping activities were affected by extreme heat resulting in a reduction of around $XXX in gross income. This, in conjunction with the reduction in livestock income as a result of less available feed, caused your farming activities to produce a loss in the 2009-10 income year. In the 2010-11 financial year, your cropping activities were affected by heavy rain and flooding, resulting in a reduction of around $XXX in gross income. This, in conjunction with increased livestock costs, caused your farming activities to produce a loss in the 2010-11 financial year.

The Commissioner is satisfied that your activities would have made a profit in the 2009-10 financial year, and would have been expected to make a profit in the 2010-11 financial year, had it not been affected by these special circumstances.

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 2009-10 and 2010-11 financial years.