Edited version of your written advice

Authorisation Number: 1013107734137

Date of advice: 13 October 2016

Ruling

Subject: Non-commercial losses - 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 20ZA financial year?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20ZA

The scheme commenced on:

1 July 19VV

Relevant facts and circumstances

You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You are a partner in a partnership.

You carry on a primary production business.

You commenced business operations in the 20VW financial year.

You submit that you were affected by special circumstances in the 20ZA financial year in that you were involved in an accident and sustained a severe injury.

You spent several months in hospital following the accident.

The injury has severely impacted on your ability to work as it is all manual labour.

You are currently working with engineering companies to adapt and modify equipment to enable you to recommence your work.

You expect to be working again in 20AB.

You have submitted detailed financial statements for the 20WX to 20YZ financial years inclusive, demonstrating you have been in a tax profit position in the years leading up to your injury.

You have submitted a detailed financial statement for the 20ZA financial year, demonstrating how your injury has affected your ability to produce a tax profit or meet any of the tests.

You have submitted a detailed monthly profit projection for the 20AB and 20BC financial years, demonstrating your ability and intention to return to both a tax profit position and meet the $20,000 assessable income test in 20AB and future years.

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

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for special circumstances. 

The discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised where:

• you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and the business activity is affected by special circumstances such that it is unable to satisfy any of the tests required; and  

• the special circumstances affecting the business activity are outside the control of the business activity

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 as your income for non-commercial loss purposes was less than $250,000 in the 20ZA financial year.

Taxation Ruling TR 2007/6 set out the Commissioners interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(a). The following has been extracted from paragraphs 47 to 54 of this Ruling:

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. 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 and affect all business within a particular industry.  

Although not limited to natural disasters, paragraph 35-55(1)(a) 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.

You suffered a serious injury. As a result, you have been unable to work for an extended period, though you anticipate you will be able to return to your business activities in 20AB. You were unable to generate sufficient business income to pass the assessable income test in the 20ZA financial year.

TR 2007/6 states that an illness affecting key personal might constitute special circumstances, depending on the facts. Your business activities rely on you as the key person. Your injury as a key person in your business is considered to be 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 prevented your business activity from meeting one of the non-commercial loss tests.

You were unable to conduct your business activity due to special circumstances. The business activity produced more than $20,000 in assessable income, and an overall profit, in the 20WX, 20XY and 20YZ financial years and you expect you will be able to achieve this again from the 20AB financial year onwards.

It is accepted that you were unable to satisfy any of the non-commercial loss tests required due to special circumstances in the 20ZA financial year.

Therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your primary production business in your calculation of taxable income for the 20ZA financial year.