Edited version of private advice

Authorisation Number: 1052013379889

Date of advice: 3 August 2022

Ruling

Subject: Special circumstances - non-commercial loss

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 business activity in your calculation of taxable income for the year ended 30 June 20XX?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a cattle business, which consists of over XX head of cattle in two locations.

You commenced business operations in the year ended 30 June 20XX.

You have never produced a profit from the cattle business.

The activity is run by you and your spouse.

You held XX-XX weaners at location B, XX-XXX cows and calves at location A, short term agistment attained at location C due to inability for approximately 30 fullblood wagyu cows that could not cope at location A due to the season impacts (could not raise a calf, poor condition).

Normal buy, sell and breeding patterns of the business are:

•         Buy:

o   live animals: purchase F1 and fullblood calves yearly at weaning,

o   genetics: purchase of semen and embryos most years to obtain better/diverse genetics.

•         Sell: 200-350kg backgrounders/feeders approximately twice a year direct to feedlots.

•         Breeding: flushing cows September for embryo creation. Artificial insemination or embryo transfer into cows in September/October, backup bulls in October-January, calving occurs July-October.

During the 20XX-XX financial year you purchased depreciable assets and deducted using temporary full expensing measures.

You were expecting a profit in the 20XX-XX financial year; however this did not occur due to ongoing significate wet weather events.

The specific impact on your property in regard to the wet weather and flooding and how the flooding materially affected your ability to make a tax profit was:

•         cattle deaths,

•         setbacks through lower weight gain of calves pushing sale of backgrounders into the year ended 30 June 20XX,

•         increased feed costs (supplement feed),

•         feed quality and quantity and

•         floodwaters.

You provided pictures showing flood waters, calf and cow condition/growth issues and feed quantity (low).

You claim that fullblood wagyu calves were affected the most. Their mothers have much less milk than angus cows normally and due to season impacts the cows were poorer and therefore less milk produced.

From previous Local Land Service vet tests and conversations, calves immune systems become compromised and are more susceptible to picking up virus's, diseases or infections which can lead to death or long term impacts. What has been detected and known at location A is theileria (from ticks), internal parasites (liver fluke, stomach fluke, barbers pole), 3day sickness, vibrio and pesti. Feed quality was affected due to weather conditions (less protein) that impacts nutrition.

You believe based on laboratory results from a sick calf that died in 20XX-XX that it indicates that the calves may have died from parasites and viruses. The A property is on a flood plain.

The number of cattle deaths each year were as follows:

•         20XX-XX income year: 0

•         20XX-XX income year: 6

•         20XX-XX income year: 9

•         20XX-XX income year: 5

•         20XX-XX income year: 9.

XX feeders were sold in September 20XX, which should have been sold in June 20XX. The setbacks were assumed to be from flooding impacts, feed quality, parasites, viruses, etc. Theileria was detected as well as compromised immune system from laboratory results.

A loss was incurred in the year ended 30 June 20XX. You claim the loss was incurred due to several reasons:

•         Fullblood wagyu calves growth and mortality severely impacted due to seasonal conditions due to their dams (mothers) ability to produce enough milk. This impact was due to feed quantity and quality being low, leading to nutrition impacts, which was caused by flood waters/prolonged wet conditions. Calves also experienced further setbacks due to feed quality, parasites and viruses in addition to the milk impact.

•         9 deaths occurred, all of which most likely can be attributed to flood/season impact at location A.

•         Growth of calves severely impacted by floods/season impact both at location A and then setback during weaning at location B at the time of the storms, due to the reasons outlined in point 1. Sold XX feeders in September 20XX, that were planned to be sold in June 20XX at even higher weights than they were in September, but due to setbacks were too light.

•         Purchased additional pellets. The feed bill would have been approximately half if calves were strong and healthy, as not as much protein would have been required.

Safeguards to mitigate the impacts of the flood:

•         extensive vaccination program that includes: Flukeare x 2/year, Nilzan, Vetmex pour-on x 2/year, Ultravac Botulinum, Ultravac 7in1, Pestiguard, Multimin, buffalo fly ear tags, calf probiotics as required,

•         trucked approximately XX wagyu cows during the year ended 30 June 20XX,

•         trucked another approximately XX wagyu and angus during the year ended 30 June 20XX, back to location C where you had attained some short term agistment out of location A as these cows could not raise a calf,

•         bought X creep feeders in the year ended 30 June 20XX for location A, however flood waters engulfed both feeders in the year ending 30 June 20XX,

•         commenced feeding calves pellets at location A, and

•         changed pellet mix in the year ended 30 June 20XX at location B from standard pellet to the more expensive calf pellet which has seen improvement in weight gain.

You stated that when cattle are gaining less than half of the target weight gain, it more than doubles the time required to get them to the correct weight.

You stated the floods affected their weight gain.

You intended to return a profit in the 20XX-XX financial year as at the date of application for this private ruling. However you will instead report a loss.

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 subsection 35-55(1)(a)

Reasons for decision

Paragraphs 12 to 15 of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion list the special circumstances limb from paragraph 35-55(1)(a) of the ITAA 1997. Special circumstances are held to be those that are distinguishable from those circumstances that occur in the normal course of conducting a business and are circumstances that specifically caused a business to make a loss. Paragraph 13A states that Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income year(s) in question where:

•         but for the special circumstances, the business activity would have made a tax profit; and

•         the activity passes at least one of the four tests or, but for the special circumstances, would have passed at least one of the four tests.

In your situation you contend that the flood severely impacted your ability to generate a profit in the 20XX-XX income year, as the cattle were impacted by death, illness, reduced weight gain and your property was damaged due to the flooding, as well as additional expenses related to feeding the cattle. Special circumstances are those that are outside of the control of the business operator and include drought, flood, bushfire or some other natural disaster, as per paragraph 14 of TR 2007/6.

You met the assessable income test under section 35-30 of the ITAA 1997 with your cattle business as your business activity earnt at least $XXX in the year ended 30 June 20XX.

Paragraph 41D of TR 2007/6 states:

For individuals who do not satisfy the income requirement, the factors that must be satisfied before deciding whether to exercise the special circumstances limb of the discretion for an income year are that:

•         the business activity is affected by special circumstances such that it is unable to produce a tax profit; and

•         the business activity either satisfies at least one of the tests or is affected by special circumstances such that it is unable to satisfy any of the tests; and

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

You have advised the business activity was impacted by the floods.

'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, including drought, flood, bushfire or some other natural disaster and specifically caused a business to make a loss.

For individuals who do not satisfy the income requirement, special circumstances are those which have materially affected their business activity causing it to make a loss. In this context, the Commissioner may exercise this discretion for the financial years in question where, but for the special circumstances the activity would have made a tax profit.

To determine what are 'special circumstances', we need to look at the context in which the phrase is used. Also, it is clear that 'special circumstances' will be something out of the ordinary or unusual.'

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course...

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

It is accepted that you were impacted by special circumstances; however, the degree to them and whether they are a regular occurrence is to be explained.

The second aspect to the first factor is that the special circumstances have impacted the business activity such that the special circumstances are the cause of the business being unable to produce a tax profit.

You have provided your financial statements which demonstrate that the business activity incurred a loss in the year ended 30 June 20XX. The majority of this loss was attributable to cattle and vet fees, fodder and lease fees for location A and B. Your cattle and vet fees were up from 20XX-XX and fodder and lease fees were down. However, you incurred a number of other expenses, that cannot be attributed to the floods.

Example 7A at paragraphs 129A to 129E of TR 2007/6 describe a situation where Commissioner's discretion might be granted for a business that had been profitable in prior years and was then impacted by a natural disaster, drought. Consideration was given to strong past performance and continuing ability to satisfy the non-commercial loss tests.

Your situation is more aligned to paragraph 129E which states:

If the facts were that the business had not made a profit in recent times, and moreover, was not reasonably expected to do so in the future, the mere fact that, for example, the business satisfied the real property test, or the other assets test, would not, in itself, indicate that it was unreasonable for losses from the business to be deferred. This would be so, even if the business activity was affected by special circumstances to some extent, but not to the extent that these circumstances caused what would otherwise be a profitable activity to be one which made a loss.

In your case since beginning of your business activity you have not made a profit to date. You were impacted by special circumstances to some extent, but they did not specifically cause the activity to not make a profit for the year ended 30 June 20XX. On XX April 20XX you advised that you were anticipating a profit for the year ended 30 June 20XX; however, you made another loss.

The Commissioner under paragraph 50A of TR 2007/6 can consider that, where a business activity is carried on by an individual who does not satisfy the income requirement and this activity would have made a loss even if it had not been affected by special circumstances, it is unlikely that it would be considered unreasonable for the loss deferral rules to apply and therefore the Commissioner is unlikely to exercise the discretion. In your circumstances, the loss that has been incurred has a direct link to business decisions made by you, mainly to delay the sale of cattle into the next financial year as you believed that the weight was too low.

Paragraphs 15 and 52 of TR 2007/6 discuss where the continued existence of special circumstances, change and become the ordinary or usual situation, where it would not be appropriate to exercise Commissioner's discretion. You advised the XXX property is on a flood plain, meaning that flooding would be a possible regular occurrence in the area.

You also advised that the loss was attributable to the death of cattle, with X in the year ended 30 June 20XX. However, the number of deaths were consistent with prior years with X in the year ended 30 June 20XX, X in the year ended 30 June 20XX and X in the year ended 30 June 20XX.

Considering the business activity has not previously reported a tax profit, that the information supplied does not indicate a profit in the foreseeable future and that the operations are on a known flood plain, it would be unreasonable for the loss deferral rules to not apply to your situation and inappropriate for the Commissioner to exercise his discretion to allow you to apply the losses against your other income.

As the discretion has not been exercised, the losses will defer until a profit is made.