Edited version of private ruling

Authorisation Number: 1011865849213

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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:

No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

Your primary production business activities are conducted under a partnership structure and commenced in 19XX.

You have stated that the yields from your primary production activities are down for the 2009-10 and 2010-11 financial years due to abnormal weather conditions affecting the region and the industry.

You have provided a copy of an industry newsletter which confirms that the 2010 season was one of the most difficult and frustrating seasons ever experienced.

You have also provided a copy of a letter received from the industry body with some general information on the industry in your region. The letter states that in 2010 much of the produce in the region was left unharvested but the outlook for the future is favourable.

Your actual income for the 2009-10 financial year was approximately $XXX.

Your actual expenses in recent years, on average have been approximately $XXX per year.

Your projected income for the 2010-11 financial year is approximately $XXX.

Your projected expenses for the 2010-11 financial year are approximately $XXX.

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 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, the region where your activities are conducted was affected by abnormal weather conditions. An industry body has confirmed that the 2010 season was one of the most difficult and frustrating seasons ever experienced.

It is accepted 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.

You have stated that your yields were down XX% during this period as a result of the weather conditions. Based on your actual income figures for the 2009-10 financial year, if approximately $XXX is produced from just XX% of your possible yields for that year then the full 100% yield would have produced income of around $XXX, resulting in a loss of $XXX.

Based on your projected income figures for the 2010-11 financial year, if approximately $XXX is produced from just XX% of your possible yields for that year then the full 100% yield would have produced income of around $XXX. Your estimated expenses for the 2010-11 financial year are approximately $XXX, suggesting you would have made a profit of $XXX. However, your actual expenses in recent years average $XXX per year. Your estimate of approximately $XXX in expenses is half the average of recent years and there is no evidence to show how this reduction is to be achieved.

The Commissioner is not 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 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 2009-10 and 2010-11 financial years.