Edited version of your private ruling

Authorisation Number: 1012453550031

Ruling

Subject: Commissioner's discretion - special circumstances

Questions:

1. 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 crop growing activities in your calculation of taxable income for the 2011-12 financial year?

Answer:

Yes.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your crop harvesting activities in your calculation of taxable income for the 2011-12 financial year?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You commenced your crop growing and crop harvesting activities in 20XX, under a partnership structure.

Your crop growing activities are carried out on land jointly owned with other family members and leasehold hold land.

The partnership has business assets with a value in excess of $100,000 and real property with a value in excess of $500,000.

Extreme weather conditions in the 20XX financial year directly affected the industry in the region where your activities are conducted, resulted in well below average yields in the 20YY financial year.

In the 20YY financial year, your crop growing activities produced an overall loss.

Your projections for the 20ZZ financial year estimate your crop growing activities will produce an overall profit in that year.

In the 20YY financial year, your crop harvesting activities produced an overall loss.

Your projections for the 20ZZ financial year estimate your crop harvesting activities will produce an overall profit.

Your income for non-commercial loss purposes in the 20ZZ 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

Multiple business activities

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

Taxation Ruling TR 2001/14 considers the question of whether business activities would constitute separate business activities for non-commercial loss purposes.

The composite term 'business activity' is not defined in the ITAA 1997. The ordinary meaning is an activity forming part or all of the taxpayer's activities 'engaged in for the purpose of profit on a continuous and repetitive basis' (Hope v. The Council of the City of Bathurst 80 ATC 4386 at 4382; (1980) 12 ATR 231 at 236), or an activity that is one of the activities that makes up the 'course of conduct' (FC of T v. Murry 98 ATC 4585 at 4596; (1998) 39 ATR 129 at 145) that is the taxpayer's business.

However, while a business may be subdivided into a number of different business activities this cannot be carried out to the point where the composite term, 'business activity', is deprived of practical meaning. An activity that forms part of a taxpayer's overall business will not be a separate 'business activity' unless it is capable of standing alone as an autonomous commercial undertaking of some sort. (paragraphs 37 and 38)

The question of whether there are one or multiple business activities is a question of fact and overall impression.

In your case, you carry on crop growing and crop harvesting activities and you maintain separate financial accounts for each activity. While you harvest your own crops, your harvesting activity mainly involves harvesting crops for other growers and is a separate business activity in its own right.

Based on the facts and the overall impression, your crop growing and crop harvesting activities are considered to be two separate business activities and Division 35 of the ITAA 1997 will need to be applied to each business activity separately.

Non-commercial loss provisions

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 his 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.

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. 

You have stated that the region where your crop growing and harvesting activities are conducted was affected by extreme weather conditions which have destroyed much of the crops due to be harvested in the 20YY season, including your own.

These weather conditions were outside your control and, therefore, are accepted as '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.

Your crop growing and harvesting business activities have never made a tax profit as you only commenced in 20XX and the 20YY financial year and was to be your first harvest season. However, based on your projections for the 20ZZ financial year, had it not been for the extreme weather events, there was a real expectation that your crop growing and harvesting activities would have produced a profit.

The Commissioner is satisfied that special circumstances caused your crop growing and harvesting activities to make a loss in the 20YY financial year. 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 20YY financial year in relation to both your crop growing and harvesting activities.