Edited version of your private ruling

Authorisation Number: 1012456711034

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 in your calculation of taxable income for the 20XX and 20YY financial years?

Answer:

No.

This ruling applies for the following period

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

You commenced your primary production business in the 200Z financial year.

In a previous private ruling the Commissioner's discretion was exercised for the 20VV and 20WW financial years due to special circumstances. In that application you stated that the property has the capacity to produce T tonnes of produce.

Your actual profit and loss statements for the 20VV and 20WW financial years shows income of approximately $X and expenses of over $Y in each year.

Initially you had projected that your proceeds in the 20XX financial year would be approximately $Z and your expenses slightly less, producing a small profit.

The region where your property is situated experienced extreme weather conditions in the 20YY financial year.

You have now revised your income projections for the 20YY, to less than $120,000 with no change to expenses, resulting in an overall loss.

You project a small increase in production and income for the 20YY financial year, with expenses remaining at similar levels, resulting in an overall loss.

Your projections for the subsequent financial year show you expect close to maximum production with income of approximately $V. You project your expenses for the same period will be around the same level, producing an expected profit of less than $1,000.

Your income for non-commercial loss purposes is expected to be above $250,000 in the 20YY and 20ZZ financial years.

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 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. 

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, your business activity was affected by extreme weather conditions in the 20XX financial year.

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 is the special circumstances that will cause your activities to make a loss in the 20YY and 20ZZ financial years.

Your projected production and income figures show that by the subsequent financial year you expect the property to be almost at full capacity, with income of approximately $X and an overall profit of less than $1,000. Your projected expenses for both the 20YY and 20ZZ financial years are over $Y. This shows had your property been able to reach close to full production in these years, the activity would still have produced a loss of over $10,000 in both years.

In fact, your actual expenses in the 20VV and 20WW financial years were over $220,000 and, while your projections show an expected increase in income from the activity over the next few years, any profit in future years will be due more to a reduction in projected expenses than an increase in production. A small increase in expenses in the 20ZZ financial year of just $1,000 would produce a loss in that year as well.

The Commissioner is not satisfied that your activities would have made a profit in the 20XX and 20YY financial years had it not been for these special circumstances.

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 20XX and 20YY financial years.