Edited version of private ruling

Authorisation Number: 1011855532198

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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 business in your calculation of taxable income for the 2009-10 to 2011-12 financial years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts

In the 20XX-XX financial year, your primary production activity was affected by an outbreak of disease.

Your stock was infected and required treatment but after a few weeks, they all appeared to make a full recovery.

When you resumed your business activities, it became apparent that many, if not all, of your stock were incapable of performing as they had done prior to the illness. Veterinary opinion was that they had sustained permanent damage as a result of the illness.

Your business activities have never produced a tax profit.

You believe your activities would have produced a profit in the 20XX-XX financial year had it not been for the outbreak of disease based on the revenue received in the first two months of the financial year.

You anticipate that your business activities will fully recover from the affects of the disease within five years of the event or by the end of the 20XX-XX financial year.

Your income for non-commercial loss purposes in the 20XX-XX financial year was above $XXX,000 and you expect this will be the case for the 20XX-XX to 20XX-XX financial years 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 $XXX,000 in the 20XX-XX financial year and you expect this will be the case in the 20XX-XX and 20XX-XX financial years 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 primary production activities were affected by an outbreak of disease in the 20XX-XX financial year. It is accepted that this outbreak was outside your control and that it is considered to be '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 in the 20XX-XX and 20XX-XX financial years and will continue to cause your activities to make a loss in the 20XX-XX financial year.

You believe that if your revenue for the first two months of the 20XX-XX financial year, prior to the outbreak, was replicated for the remainder of the year, the business would have produced a profit. You also anticipate that your business activities will fully recover from the affects of the outbreak within five years of the event or by the end of the 20XX-XX financial year. However, your business activities had not produced a profit prior to the outbreak and there is no evidence that the outbreak caused your activities to produce a loss in the 20XX-XX and 20XX-XX financial years or will continue to cause your activities to produce a loss in the 20XX-XX financial year. In addition, there is no evidence that your activities will be able to produce a tax profit even five years after the outbreak.

The Commissioner is not satisfied that your activities would have made a profit in the 20XX-XX and 20XX-XX financial years or would have been expected to make a profit in the 20XX-XX financial year even if it had not been affected by 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 activities for the 20XX-XX to 20XX-XX financial years.