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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 to 2012-13 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

The scheme commenced in

1 July 2009

Relevant facts

You commenced your primary production business activity in 1997.

Livestock numbers were initially limited due, in part, to limited resources after property purchase costs.

The district where your property is situated was officially declared drought affected throughout the majority of the period between December 2002 and June 2009. During this time, you lost around 40% of your livestock but did not receive any drought relief payments.

Your income tax returns lodged for the 1999-00 to 2008-09 financial years show your primary production business activities have never produced a profit.

After the drought, you found yourself in the same position as when you started out. The business has gradually recovered and it is now expected to produce a tax profit in the 2012-13 financial year, or four years after the drought.

Ownership of the property transferred from you to an incorporated trustee for a family super fund on 30 June 2011. You now lease the property from the super fund.

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 to 2012-13 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 was above $250,000 in the 2009-10 and 2010-11 financial years and you expect this will be the case in the 2011-12 and 2012-13 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, the region where your property is situated was drought affected throughout the majority of the period between December 2002 and June 2009.

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 commenced your primary production business activity in 1997 and your activities have remained essentially livestock activities. In the five years from 1997 to 2002, your activities never produced a profit. While it is accepted that the drought conditions between 2003 and 2009 contributed to your business losses during this period, there is no evidence that the drought was the cause of your losses in the 2009-10 and 2010-11 financial years.

The Commissioner is not satisfied that your activities would have made a profit in the 2009-10 and 2010-11 financial years, or would have been expected to make a profit in the 2011-12 financial year, had it not been affected by special circumstances in these earlier years.

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 to 2011-12 financial years.

As your figures show that your activities should produce a profit in the 2012-13 financial year, the Commissioner cannot exercise the discretion for this year.