Edited version of your private ruling

Authorisation Number: 1012152532231

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Subject: non-commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of 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 2014-15 financial years?

Answer

No.

This ruling applies for the following periods:

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

Year ended 30 June 2015

The scheme commenced on

1 July 2001

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling and

· further information received.

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

You carry on a primary production business.

You purchased an existing grazing property in 2002 and soon thereafter commenced to conduct your primary production business.

You purchased the property in a very run down condition. Fences were down, weed infestation of pasture was prominent and no fertilizer history existed. Stock had been taken on agistment at the farm for the previous three to five years.

To get the property up to a standard able to support the recommended viable number of stock units, you undertook a significant amount of work on the property. You incurred expenditure to bring pastures and infrastructure up to a satisfactory standard capable of providing reasonable net returns.

Due to a shortage of funds at the time of purchase you borrowed most of the purchase price. The resultant interest expenses have contributed significantly to the losses in previous years.

You submit that the drought from 2006-2010 had a significant negative impact on your property.

You submit that the drought prevented you from holding sufficient stock numbers necessary to turn a profit. At the same time it caused a cut in production, thereby pushing up the price of replacement breeding stock. It also resulted in greater expenditures on dry fodder and other supplies.

Your business was affected by a severe bushfire during the drought and flood in 2010 and 2011.

The business had never made a profit.

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 years, 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 (excluding your business losses), reportable fringe benefits and reportable superannuation contributions exceed $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 relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'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, including drought, flood, bushfire or some other natural disaster.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a 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

Later, in the Federal Court Case of Employment, Education, Training Youth Affairs, Department of v. Barrett (1998) 82 FCR 524; (1998) 27 AAR 291; (1998) 52 ALD 499; (1998) 3SSR 38 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Beadle Director-General of Social Security, Re (1984) 1 AAR 362; (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. 

In your case the Commissioner accepts that your business was affected by special circumstances in relation to the drought, bushfires and flooding.

However demonstrating that your business was affected by special circumstances is not sufficient for the discretion to be applied. You also need to show that it was the special circumstances that caused you to make a loss.

The Commissioner is not satisfied that you would have made a profit in the 2009-10 to 2014-15 financial years but for these adverse conditions. Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for those years.