Edited version of your private ruling

Authorisation Number: 1012459904399

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 2011-12 and 2012-13 financial years?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts

You commenced your primary production business activity in 19xx.

The Commissioner had exercised his discretion in past years due to the continuing affects of the severe and prolonged drought on your primary production business. You had expected the activity to profitable in the 2011-12 and 2012-13 financial years, with a modest profit, of around $X, projected in each year.

In early 2012, you suffered a number of serious health issues and underwent two surgical procedures. From the last quarter of the 2011-12 financial year, you concluded that your health issues made it impracticable for you to continue your farming business. These concerns led you to wind down the business activity and place the farm on the market. The farm has now sold.

Your actual figures for the 2011-12 financial year show that income from the activity increased by almost $100,000 on the previous year, and expenses decreased by almost $Y. However, the activity produced an overall loss of around $X.

Your actual and projected figures for the 2012-13 financial year show an expected overall loss of over $Y.

Your income for non-commercial loss purposes in the 2011-12 financial year was above $Z and you expect this will be the case for the 2012-13 financial year 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 $Z.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $Z in the 2011-12 financial year and you expect this will be the case in the 2012-13 financial year 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.

However, the use of the word 'including' indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question.

In your case, your business activity had been affected by a severe and prolonged drought in previous years but you had projected a profit in the 2011-12 financial year. However, in early 2012 you suffered a number of serious health issues and underwent two surgical procedures. From the last quarter of the 2011-12 financial year, you concluded that your health issues made it impracticable for you to continue your farming business. These concerns led you to wind down the business activity and place the farm on the market. The farm has now sold.

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.

Your actual figures for the 2011-12 financial year show income from the activity had increased by almost $Y and expenses decreased by almost $Y on the previous financial year figures. These figures show a marked turn around in the business activity. It is reasonable to assume that, but for your health issues in early 2012, the activity would have continued to improve and produce a profit in the 2011-12 and 2012-13 financial years.

The Commissioner is satisfied that your activities would have made a profit in the 2011-12 financial year, and would have been expected to make a profit in the 2012-13 financial year, had it not been affected by these special circumstances.

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 2011-12 and 2012-13 financial years.