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Ruling

Subject: Non-commercial losses

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 2013-14 financial years?

Answer No

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 1997

Relevant facts and circumstances

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a primary production business.

The business has run at a loss for at least the past 10 financial years.

You submit that the commodity price was poor for a number of the past 10 financial years.

You submit that losses in the 2005-06 financial year were significantly reduced as the commodity price was good and yield was up.

The property was affected by a disease in the 2006-07 to 2008-09 financial years.

The effects of disease lead to a loss of production and impacted on the cash flow of the property with extensive additional costs associated with replanting of disease resistant crop varieties. Costs included the replacement planting and included additional labour, fuel, soil health and nutrient application costs.

By the 2009-10 financial year the majority of your property was replanted with disease resistant varieties.

In addition to replacing older varieties changes to planting procedures have also been implemented to help foster long term sustainability. You submit that these improved practices, in addition t the new disease resistant plants will lead to an improved strike rate and hence higher crop yields.

A significant improvement was seen in the 2009-10 financial year but the business still ran at a loss.

You anticipate making a profit by the 2014-15 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision

For the 2009-10 and later financial year, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

§ you satisfy the income requirement and you pass one of the four tests

§ the exceptions apply, or

§ the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred.

Taxation Ruling TR 2007/6 explains that for those individuals who do not meet the <$250,000 income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year.

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.

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters. 

Those discretions are intended to be applied to a great variety of situations. In such context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 6 ALD 1 at 3:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

You have stated that disease affected the industry and as a result you replanted older varieties with disease resistant highly productive varieties. You contend the additional expenses associated with replanting disease resistant varieties prevented you from making a tax profit.

The Commissioner does not accept that these circumstances are 'special' in the sense required by law because they are not events out of the ordinary or normal course of business. It is an accepted practise in the industry to replant a portion of the property each year. Similarly it is common practise to replant different varieties.

Even if the circumstances could be considered to be 'special' in the relevant sense, (which is not accepted) the Commissioner does not accept that you would have made a tax profit without the effects of disease. It is noted that you were unable to provide any evidence of the business ever returning a profit. It would be expected that if it was the disease that caused your business to make a loss, then it would have made a profit in the years in which the crop was not affected by disease.

In conclusion there Commissioner is not satisfied that the introduction of a disease resistant crop, constitutes special circumstances. Furthermore, the Commissioner is not satisfied that were it not for the introduction of new varieties your activity would have made a profit.

Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for those years.