Edited version of your written advice

Authorisation Number: 1013138304749

Date of advice: 8 December 2016

Ruling

Subject: Commissioner's discretion for 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 activity in your calculation of taxable income for the 20AA-BB income year?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20BB

The scheme commences on:

1 July 20AA

Relevant facts and circumstances

You have a livestock production activity.

Your farm is located in XXX.

Your business activity began in June 20ZZ.

Your intention is to lease an additional land for the 20CC financial year.

You have met the assessable income test in the 20YY, 20XX and 20WW financial years.

You sold all of your livestock in the 20WW financial year due to the drought conditions in the area.

According to Bureau of Meteorology, the department of Primary Industries and several news sources your property was in an area affected by drought from late 201X to mid-201X.

As a consequence of the insufficient rainfalls that lead to the destruction of your pasture in the 20CC financial year the livestock that you had purchased that year couldn't be sold.

You were unable to meet the assessable income test for the 20BB financial year.

The area received enough rainfall in the winter months of the 20BB calendar year to produce a good pasture for the livestock.

You're sale projections for the 20CC financial year show that you meet the $X0,000 assessable income test for that year.

Your income for non-commercial loss purposes for the 20AA-BB financial year was less than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - section 35-10

Income Tax Assessment Act 1997 - section 35-30

Income Tax Assessment Act 1997 - section 35-35

Income Tax Assessment Act 1997 - section 35-40

Income Tax Assessment Act 1997 - section 35-45

Income Tax Assessment Act 1997 - section 35-55

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless:

• the exception in subsection 35-10(4) of the ITAA 1997 applies; or

• you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or

• if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your assessable income from sources not related to this activity was more than $40,000 in the 201X-1X financial year. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 201X-1X financial year.

The Commissioner's discretion - special circumstances

Where the income requirement is satisfied, the Commissioner's discretion, under paragraph 35-55(1)(a) of the ITAA 1997, can be exercised where a business activity is affected by special circumstances, outside the control of the operators, such that it is unable to satisfy any of the tests.

Taxation Ruling TR 2007/6 sets out the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 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) 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.

In your case, your primary production activities were unduly affected by drought conditions in your local area between 20KK and 20BB. While you were able to meet the assessable income test in the 20FF-AA income year this was as a result of the sale of your entire stock of livestock. These conditions also meant that the pasture you had for the fattening of your livestock was destroyed, leading to your inability to have any saleable livestock for the 20AA-BB financial year.

The drought conditions affecting your local area between 20KK and 20BB are considered to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. It is accepted that these special conditions were outside of your control and as a result, you were unable to satisfy any of the tests required in the 20AA-BB income year.  

The information provided demonstrates that there was a reasonable expectation that your business activity would have satisfied one of the tests during this period, had it not been for the drought. Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 has been granted for these income years.