Edited version of private ruling

Authorisation Number: 1011874277623

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Ruling

Subject: Non-commercial losses

Question 1

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 activities in the calculation of your taxable income for the 2009-10 to 2012-13 financial years?

Answer: No

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your activities in your calculation of taxable income for the 2009-10 to 2012-13 financial years?

Answer: No

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These document forms part of and are to be read with this description. The relevant documents are:

Your Private Ruling application which we received on XX July 20XX

You commenced the business on XX July 20XX. You meet the assessable income test, the real property test and the other assets test.

You employ up to three fulltime staff.

You expect agistment income to increase after stock is reduced through sales.

You receive rent from staff who reside on your property.

You plan to try to secure lower cost alternative financing for the business from family and associates or from the trust set up for your benefit.

You have provided industry evidence in the form of the submission to Treasury.

The prolonged drought has affected the sale of your yearlings, and increased your costs as the price of feed has increased.

The global financial crisis has hurt sales at your target market. You are now aiming for the top end of the market.

Bushfires in 20XX affected the farms immediate and surrounding areas not the farm itself.

In 20XX a fire destroyed the offices, carport and the homestead.

You do not meet the income requirement as your adjusted taxable income from other sources exceeds $250,000.

Relevant legislative provisions

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

Reasons for decision

Summary

The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 (special circumstances) to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2012-13 financial years. There are no special circumstances that have affected your business activity in the 2009-10 year and later years which would allow the non-deferral of losses.

The discretion in paragraph 35-55(1)(c) of the ITAA 1997 in relation to the 2009-10 to 2012-13 years will not apply where the failure to make a profit is for reasons other than the nature of the business itself.

Decision

For the 2009-10 and later income years, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless (relevant to this division):

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

· the exceptions apply

· the Commissioner exercises his discretion.

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

Special circumstances

'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, including drought, flood, bushfire or some other natural disaster.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

The question of what constitutes 'special circumstances' has been judicially considered. 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.

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 not supplied any evidence of any special circumstances which affected your activities. You have stated that your activities have been affected by the global financial crisis, disease and the adverse weather events. Your activities would not have been any more affected by the global financial crises and disease than others in the same industry in Australia.

Your property was not directly damaged by the 20XX Victorian bushfires or enough to take the matter out of the ordinary course to consider special circumstances.

In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the 20XX-XX to 2012-13 financial years.

Commercially viable

The relevant discretion may be exercised for the income year in question where:

· it is in the nature of your business activity that there will be a lead time before a tax profit can be produced

· there is an objective expectation your business activity will produce a tax profit within a commercially viable period for your industry.

Taxation Ruling TR 2006/7 provides guidelines on exercising the discretion. In order to demonstrate that the objective expectation exists, the ruling states you should produce evidence from independent sources showing that the business activity will produce a tax profit, showing the period within which a commercially viable business would do so. Appropriate independent sources include industry bodies or relevant professional associations, government agencies, or other taxpayers conducting successful comparable businesses.

You have provided evidence that the start up phase for your activities is between 5-10 years. In your situation, we accept it is in the nature of your activity that there will be a lead time before a profit can be expected.

You commenced your activities on XX July 20XX. You meet the assessable income, real property and other assets tests. You do not expect to produce a tax profit until 2014. You have stated that it takes between 5 to 10 years for your business activity to become profitable, but your business will have been operating for 14 years before you expect to make a tax profit.

Accordingly the Commissioner will not exercise his discretion to allow you to claim your losses in 2009-10 to 2012-13 financial years as, based on the information you have provided, you will not make a tax profit within a period which is commercially viable for your industry.