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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 in your calculation of taxable income for the 2009-10 financial year?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You commenced your livestock breeding business more than 10 years ago.

It can be up to 30 months from the time some animals are impregnated to the sale of the offspring at auction.

Your business activities produced a profit of almost $XXX,000 in the 20XX-XX financial year.

In the 2007-08, an outbreak of disease in the industry meant that none of your stock was successfully serviced in that year. This meant that you had no offspring to offer for sale in the 2009-10 financial year.

In the 2008-09 financial year, offspring born as a result of the 2006-07 breeding season, produced income of over $XXX,000.

Your business activities produced a loss of approximately $XXX,000 in the 2009-10 financial year.

You expect to produce a profit in the 2010-11 and 2011-12 financial years.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $XXX,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 financial year.

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. 

In your case, your livestock breeding activities were affected by an outbreak of disease in the 2007-08 financial year. This meant that none of your stock was successfully impregnated in that year.

It is accept 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 2009-10 financial year.

The outbreak of disease in the 2007-08 financial year meant that you had no offspring to offer for sale in the 2009-10 financial year. In the 2008-09 financial year, offspring born as a result of the 2006-07 breeding season, produced income of over $xxx,000. Had you been able to produce the same income in the 2009-10 financial year, your activities would have produced a profit. Your business activity has been profitable in the past and you project that the business will return to profit in the future.

The Commissioner is satisfied that your activities would have made a profit in the 2009-10 financial year 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 for the 2009-10 financial year.