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

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You have stated that your primary production business activity was affected by low rainfall in the 2008-09 and 2009-10 financial years which impacted your production.

You have provided rainfall figures from the nearest weather station to your property, taken from the Bureau of Meteorology website, which show annual rainfall in the region averages around 340 to 350 millimetres and the annual figure for the 2010 calendar year was around two thirds of the average.

Your actual income and expenditure figures for the 2009-10 financial year show income of approximately $X and expenditure of over $X.

You believe that, had you received sufficient rainfall, your primary production business activities would have produced $X in assessable income in the 2009-10 financial year.

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

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.

You have stated that your business activities were affected by low rainfall in the 2009-10 financial year which impacted your production in the 2009-10 financial year.

Excessively low rainfall and drought conditions would generally be considered special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

There is no evidence that the region where your property is situated was officially drought declared during this period. When the rainfall figures you provided are viewed in financial years, as they would apply to your business activity, the rainfall in the 2009-10 financial year is only marginally lower than the average for the region.

This would not be considered drought conditions for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. These variations would be considered to be part of normal weather fluctuations and, while the rainfall levels during this period were outside your control, they are not considered to be 'special circumstances'.

In addition, you believe that, had you received sufficient rainfall, your primary production business activities would have produced $X in assessable income in the 2009-10 financial year. With your expenses for the same period being over $X, had you been able to produce this level of income, your activities would still have resulted in an overall loss, and this is before taking into account any additional expenses that would have been incurred to maintain and harvest the additional produce.

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 2009-10 financial year.