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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 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 in

1 July 2009

Relevant facts

Your primary production activity is conducted on approximately X hectares.

Your produce is grown in a good climate and produces a larger, good quality product which can be harvested when supply is light nationally.

Your primary production activity does depend largely on the timing and extent of certain climatic events beyond the control of the grower. These events include temperature extremes and their timing, frosts and winds. These events can impact production in a number of ways.

Since the 2006-07 financial year, your activities have been affected by biennial bearing as a result of a severe frost in 2006.

The cold dry spring experienced in 2010 has also affected the production in the 2010-11 financial year.

As a result of these and other factors, your yields in both the 2009-10 and 2010-11 financial years were reduced, resulting in an overall loss in both years.

Your activities regularly produced a profit prior to these events.

Your yields in the 2009-10 and 2010-11 financial years were significantly reduced than that of the 2008-09 financial year while prices received for your product increased

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, your primary production activity has begun a cycle of biennial bearing as a result of a severe frost in 2006. The affects of this cycle are evident in the fact that your business activity has been producing a loss in alternate years since the 2005-06 financial year. In the 2010-11 financial year, lower than usual minimum temperatures affected the pollination process which in turn reduced the overall crop produced in that year.

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.

Your average crop figures show that your primary production activity would have produced a profit in both the 2009-10 and 2010-11 financial years had it not been for the special circumstances (based on the prices received in these years).

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 in relation to your primary production activities for the 2009-10 and 2010-11 financial years.