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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 livestock breeding business activities in your calculation of taxable income for the 2009-10 to the 2015-16 financial years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commenced in

1 July 2009

Relevant facts

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

· your application for private ruling which we received on X August 20XX, and

· additional information which we received on XX September 20XX and XX October 20XX.

Your commenced your livestock breeding business activities more than 20 years ago.

You do not own your own breeding property, preferring to pay premium rates to access 'exceptional facilities' at an established stud. In your business plan you describe the stud and its stock as one of Australia's best.

In 20XX, one of your potentially best offspring had to be euthanized due to injury. Had the animal survived, you believe it had the potential to attract a good price.

In 20XX, there was an outbreak of disease which resulted in wide spread quarantining and a general ban on animal movement.

With your livestock agisted at the stud at the time of the outbreak, the travel bans meant that your breeding options were limited.

One of your prize animals did become ill. You have only been able to speculate on the impact of the disease on the animal's income earning potential.

None of your other animals contacted the disease, although some animals failed to conceive and of those that did, the resulting offspring lacked size and achieved lower than expected prices at the sales in 20XX.

In the 2009-10 financial year, your business activities produced income of more than $600,000 and incurred expenses of more than $X,XXX,000, including cost of goods sold, producing an overall loss of more than $XXX,000.

In the 2010-11 financial year, two factors impacted your income in the year;

1. one of your potentially better offspring was passed in at the annual sales. Other similar animals have sold in the past for over $XXX,000.

2. another of the offspring was withdrawn from sale and required surgery for a defect. Other animals with a similar pedigree have sold for more than $X00,000.

In the 2010-11 financial year, your business activities produced income of more than $XXX,000 and incurred expenses of more than $X,XXX,000, producing an overall loss of more than $X,000,000.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $XXX,000 and you expect this will be the case for the 2011-12 to 2015-16 financial years as well.

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 and you expect this will be the case in the 2011-12 to 2015-16 financial years 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, your livestock breeding activities were affected by an outbreak of disease in the 20XX-XX financial year. It is accepted that this outbreak was outside your control and that it is considered to be '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 the 20XX-XX and 20XX-XX financial years and will continue to cause your activities to make a loss up to and including the 20XX-XX financial year.

Only one of your animals actually contracted the disease. You have only been able to speculate on the impact of the disease on your breeding activities and have not been able to provide any figures of the amount of income lost each year as a result.

Your other animals were only affected by the travel bans in place in the 20XX-XX financial year which limited your breeding options in 20XX year. There is no evidence to support the claim that the travel ban in place during the disease outbreak was the cause of your losses in the 2009-10 financial year. You yourself describe the stud where you agist your animals as one of Australia's best.

Your livestock breeding activities were also affected by other health issues. Like disease, other heath issues affecting livestock can be considered 'special circumstances' in certain circumstances.

In 20XX, one of your potentially best offspring had to be euthanized due to injury. Had the animal survived, you believe it had the potential to attract a good price. As this animal was born in 20XX, it would have been offered for sale in 2007 and was not the cause of your losses in the 20XX-XX or later financial years.

In 20XX, one of your animals was withdrawn from sale and required surgery due to a defect. Other animals with a similar pedigree have sold for more than $XXX,000. Your losses in the 20XX-XX financial year were over $X,000,000. Had the animal been able to be sold for the top price of more than $XXX,000, your losses for the year would still have been around $XXX,000.

The Commissioner is not satisfied that your activities would have made a profit in the 20XX-XX and 20XX-XX financial years, or would have been expected to make a profit in the 20XX-XX to 20XX-XX financial years, had it 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 livestock breeding business activities for the 20XX-XX to 20XX-XX financial years.