Edited version of private ruling

Authorisation Number: 1011859676197

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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 financial year?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Your farming enterprise commenced in the mid 1970s on a property of approximately XX hectares.

The property currently runs livestock and has XX hectares of forestation plantations.

In recent years, the property has been severely affected by very unfavourable seasonal conditions which have resulted in low stocking rates and high input costs.

The property last produced a tax profit in the 2001-02 financial year.

Severe drought hit in the 2002-03 financial year and, as a result, the property reduced livestock numbers by one third. Costs increased by 70% and income reduced.

An improved spring season in the 2003-04 financial year lead you to invest capital expenditure in an effort to reduce future feed costs. However, the recurrence of drought conditions meant the fodder was used earlier than expected and by 2007 additional fodder had to be purchased to supplement stock feed.

By the 2006-07 financial year, feed costs had more than doubled that of the previous year and you began to look at ways to reduce costs. Changes were made to livestock numbers, with some breeds reduced dramatically.

In the 2007-08 financial year, as the drought continued, stock prices decreased and there were fewer animals to sell. You sought advice from experts in the field and were advised increase stock levels with animals that were less labour intensive.

On this advice, you are now re-building stocks and you project that you will return to profit in the 2010-11 financial year.

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

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 enterprise has been affected by prolonged drought conditions since the 2002-03 financial year. This has led to a significant reduction in stock levels and increased labour and fodder costs being incurred.

It is accept that the prolonged drought 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.

In your case, your farming enterprise last produced a tax profit in the 2001-02 financial year. Severe drought conditions commenced in the 2002-03 financial year and continued, to varying degrees, until the 2009-10 financial year. During this period, several strategies have been employed to combat the conditions. Stock levels dropped dramatically which reduced some income streams. Additional costs have also been incurred for fodder and labour, to feed the stock, as well as on consultancy fees to find the best way forward. In the 2009-10 financial year, you began to re-build your stock level but are still only approximately one quarter of the 2001-02 levels. As these levels continue to grow, you project that you will return to profit in the 2010-11 financial year.

The Commissioner is satisfied that your activities would have made a profit in the 2009-10 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 financial year.