Edited version of private ruling

Authorisation Number: 1011864158999

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Ruling

Subject: non commercial losses

Question

Will the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2009-10 to 2011-12 financial years to allow you to deduct your losses from your vineyard due to special circumstances?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You run a vineyard.

You have been running at a loss.

You submit that increased water costs have had an impact on the profitability of your vineyard. In addition there has been a significant oversupply of grapes.

You believe prices will improve and that due to a number of factors you will make a profit in the future.

Your income for non commercial loss purposes is over $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-55

Income Tax Assessment Act 1997 Section 35-55(1)(a)

Reasons for decision

For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply, or

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

No exhaustive definition of 'special circumstances' is given in the legislation.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course…

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. TR 2007/6 states at paragraph 47:

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 cited various factors affecting grape growers including an increase in water costs and an oversupply of grapes.

It is considered that receiving a low price per tonne of grapes, oversupply or the failure to secure a contract are a result of ordinary recurrent market fluctuations that affect all businesses within your industry, and are circumstances that might be reasonably expected to occur when carrying on a business activity. Also whilst we accept that the increase in water costs was not within your control, we consider this to be an ordinary and expected consequence of conducting a primary production business in Australia. We consider the negative factors you have cited affecting the industry as a whole to be normal occurrences and not unusual, uncommon or exceptional.

Therefore the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 to 2011-12 financial years as you have not proven that special circumstances prevented you from making a taxable profit.