Edited version of your private ruling

Authorisation Number: 1012469042235

Ruling

Subject: Commissioner's discretion

Question:

Will the Commissioner exercise the discretion in subsection 35-55(1) 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 relevant financial years?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

You commenced a primary production business in the 200X financial year on property A.

A second property, property B, was purchased soon after.

A few years later, you developed a livestock breeding program and acquired an interest in an animal and signed an agreement to import genetic material from overseas for lineage genetics development and enhancement.

In the 200Y financial year, you had to focus on other business activities to ensure you had work for your employees.

Weather conditions affected the efficiency of the breeding program and you decided to purchase another farm with large feed crop, irrigation and artificial insemination facilities.

You purchased property C and property A was put on the market. Most of the livestock were moved to the new property.

In the relevant financial year, the region where the property is situated was affected by a major weather event.

You incurred additional expenses, totalling $X, as a result.

Your cash flow actuals and projections show that your business activity made losses greater than $X in the relevant and subsequent financial years and is expected to make a loss greater than $X in the 20ZZ financial year as well.

Property A had not sold, so funding for the ongoing expenses of the farm have been funded by a series of dividend payments from shares you own. The first of these dividends were paid in the relevant financial year which resulted in your income for non-commercial loss purposes exceeding $250,000.

Your income for non-commercial loss purposes also exceeded $250,000 in the subsequent financial year, and you expect this will be the case in the 20ZZ financial year as well.

You have provided some independent evidence to show that the commercially viable period for your industry is five to six years.

You estimate that primary production business will produce a tax profit in the 2013-14 financial year.

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).

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

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 was above $250,000 in the relevant and subsequent financial years and you expect this will be the case in the 20ZZ financial year as well.

Special circumstances

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 primary production business was affected by weather events in the relevant 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 was the special circumstances that caused your activities to make a loss.

You have provided details of the additional expenses incurred as a result of the weather event, totalling $X. Your losses in the relevant financial year totalled more than $X.

Based on these figures, the Commissioner is not satisfied that your activities would have made a profit in the relevant and subsequent financial years, or would have been expected to make a profit in the 20ZZ financial year, had it not been affected by these special circumstances.

Therefore, the Commissioner is unable exercise the discretion available in accordance with paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial years.

Commercially viable period

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

In your case, you commenced your primary production business in the 200X financial year and you project that your activity will produce a tax profit in the 2013-14 financial year, or nine years after you commenced.

You have provided some independent evidence that suggests the commercially viable period for your industry is approximately six years.

Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is nine years.

The reason your activities have continued to make a loss is peculiar to your situation and is not inherent to the nature of the business.

Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

Therefore, the Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997 for the relevant financial years.