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Authorisation Number: 1012015454869

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Ruling

Subject: Commissioner's discretion - special circumstances

Questions:

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 primary production business in your calculation of taxable income for the 2009-10 and 2010-11 financial years?

Answer: Yes.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your primary production business in your calculation of taxable income for the 2011-12 financial year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts

You commenced your business activity, on an irrigation farm, over 15 years ago.

You employ a full time farm manager, and casual staff as required, and you assist on many weekends and holidays throughout the year.

Following a review of farm operations in 2007-08, the farm's focus is progressively being changed from large scale livestock and grain production to specific crop production.

You have invested in new crop production and harvesting equipment, and increased the farm's permanent irrigation water right.

Drought and the lack of availability of irrigation water severely impacted your crop production in the 2009-10 financial year.

You have provided historical water allocation data for the property showing your water allocations dropped in 2008-09 to just a third of what they had been in 2005-06.

In the 2009-10 financial year your primary production business income was approximately $X and your total expenses were approximately $X.

In the 2010-11 financial year, excessive rainfall caused flooding in some of your paddocks, killing the crops. Due to the consistently wet summer, the quality of the crops that was produced was less than optimum which resulted in a price reduction. In addition, the same heavy rainfall conversely produced a glut of the crops from un-irrigated properties, resulting in very low seasonal prices for the crops.

The flooding also affected your other crop production. Production was reduced by more than half and some lesser quality or damaged crops were kept for cattle feed.

In the 2010-11 financial year your primary production business income was approximately $X and your total expenses were approximately $X.

You believed that in an average year, where you received at least 70% of your water entitlement, farm production would provide approximately $X in assessable income and incur approximately $Xin expenses, producing an overall profit.

You have provided copies of tax invoices for produce sold in the 2008-09, 2009-10 and 2010-11 financial years.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $250,000 and you expect this will be the case for the 2011-12 financial year 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 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, your primary production business activity was affected by drought conditions in the 2009-10 financial year followed by flooding in the 2010-11 financial year.

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 caused your activities to make a loss.

You have provided details to show that the farm's production in an average year, based on a 70% water allocation, could produce income of approximately $X. These projections seem reasonable based on prices received in past years. Had your activities been able to produce this level of income in the 2009-10 and 2010-11 financial years, based on the actual expenses incurred in these years, your activities would have produced a profit.

The Commissioner is satisfied that your primary production business activities would have made a profit in the 2009-10 and 2010-11 financial years had they not been affected by 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 for the 2009-10 and 2010-11 financial years.

Due to the nature of your primary production business activities, there is nothing to suggest that the special circumstance described above will continue to cause your business activities to make a loss in the 2011-12 financial year. Therefore, the Commissioner cannot exercise the discretion for this year.