Edited version of private ruling

Authorisation Number: 1011865846850

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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 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 commenced your activities in 2XXX.

Your property was planted in stages with full commercial production not being reached until the 2009-10 financial year.

Your activities produced a tax profit in the 2008-09 financial year.

During this time, the region was suffering the long term affects of drought which resulted in the business incurring costs of over $50,000 for the purchase of water, fertiliser and other input costs.

These costs increased in the 2010 financial year, more than tripling that of the previous year.

The growing conditions in the region were also exceptionally difficult which resulted in a significant reduction in crops; reducing income by approximately 50% of the businesses expected long term average.

In 2011, the abnormal weather conditions continued with unprecedented rainfall which caused major disease issues. Losses were incurred when diseased crops were downgraded and crop yields were reduced.

Your crop yields for the 2009-10 financial year were almost half that of the previous year.

In the 2010-11 financial year, crop yields were down approximately one third on 2008-09 yields.

You expect your activities to produce a tax profit again in the 2011-12 financial year.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years 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 in the 2009-10 and 2010-11 financial years.

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, the region where your property is situated had been in drought for some time which had required you to incur additional costs to mitigate the affects on your business activities. In 2011, the abnormal weather conditions continued with unprecedented rainfall which brought disease and reduced crop yields.

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.

In your case, despite the difficult growing conditions, your activities did produce a tax profit in the 2008-09 financial year. Additional costs for the purchase of water, fertiliser and other drought related input costs more than tripled in the 2009-10 financial year and yields reduced. When the rain came in the 2010-11 financial year, disease issues arose. Losses were incurred when crops were downgraded and yields reduced.

The Commissioner is satisfied that your activities would have made a profit in the 2009-10 and 2010-11 financial years 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.