Edited version of private ruling

Authorisation Number: 1011875697467

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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 business activities in the calculation of your taxable income for 2008-09 to 2012-13 financial years?

Answer: No.

This ruling applies for the following periods

Year ended 30 June 2009
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 2008

Relevant facts

You commenced your farming activities over 12 years ago. The activities are conducted on a part-time basis on a XXX hectare property.

The region where your property is situated has been affected by drought at various times in the past 10 years.

As a result of the drought conditions, in 20XX you sold more than half your livestock due to lack of water and feed.

Since then, the drought conditions have abated and you expect to begin buying and sell livestock and you expect to meet the assessable income test in the 2012-13 financial year.

Your assessable income for the 20XX-XX and 20XX-XX financial years was above $40,000 but below $250,000 and you expect this to be the case for the 2010-11 to 2012-13 financial years as well.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35
Income Tax Assessment Act 1997 - section 35-10
Income Tax Assessment Act 1997 - section 35-30
Income Tax Assessment Act 1997 - section 35-35
Income Tax Assessment Act 1997 - section 35-40
Income Tax Assessment Act 1997 - section 35-45
Income Tax Assessment Act 1997 - section 35-55

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

· the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your assessable income from sources not related to this activity has been, or is expected to be more than $40,000 for the 20XX-XX to 2012-13 financial years. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activities have not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 and are not expected to until the 2013-14 financial year. 

The Commissioner's discretion - special circumstances 

Were the income requirement is satisfied, the Commissioner's discretion, under paragraph 35-55(1)(a) of the ITAA 1997, can be exercised where a business activity is affected by special circumstances, outside the control of the operators, such that it is unable to satisfy any of the tests.

Taxation Ruling TR 2007/6 sets out the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling. 

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. 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 and affect all business within a particular industry. 

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.

In your case, the region where your farm is situated has been drought affected to varying degrees over the past decade.

It is accepted that these conditions were outside your control and 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 prevented your activities from meeting one of the tests.

Your activities are carried out on a relatively small scale for this type of industry. Your projected income figures show that even with favourable weather conditions, you do not expect to produce assessable income of more than $20,000 until 2012-13

The Commissioner is not satisfied that your activities would have met one of the four tests even if it had not been affected by 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 2008-09 to 2012-13 financial years.