Edited version of private advice

Authorisation Number: 1052174374482

Date of advice: 5 October 2023

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 to allow you to include any losses from your farming activities in the calculation of your taxable income for the 20XX to the 20XX income years?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XX (you) are a sole trader.

You have a livestock farm and carry on a primary production (PP) business activity.

You commenced business activity in 19XX on the farm XX located at XX as well as another rural property owned by your family at XX NSW.

Several decades ago, you converted the properties to maintain livestock.

At all times since 19XX, your primary occupation has been a farmer, which has been reported in all your income tax returns since.

The business is conducted over XX hectares at XX and XX hectares at XX.

You are currently running a farm comprising the following:

•         Prime lamb production of XX ewes producing XX p.a. for sale

•         XX head of cattle producing XX progeny p.a. for sale

•         XX bales of wool p.a. for sale

•         Producing XX tonnes of hay for internal consumption or part sale thereof.

Production is static annually as stock are usually all self-replacing.

You have spent hundreds of thousands of dollars on plant and equipment, and buildings over the last XX plus years.

You provided specific reasons showing that you have been impacted by special circumstances that have caused your business loss.

You received a trust distribution income and rental income for the financial year ending 30 June 20XX over $XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Division 35-10

Income Tax Assessment Act 1997 Division 35-10(2E)

Income Tax Assessment Act 1997 section 35-55

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

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Division 35 will apply to defer a non-commercial loss from a business activity unless:

•         you satisfy the income requirement, and you pass one of the four tests;

•         the exceptions apply; or

•         the Commissioner exercises his discretion.

Section 35-10 provides that an income requirement must be met (along with certain other tests), to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise his discretion to allow the inclusion of the losses.

The income requirement under subsection 35-10(2E) will be met if your income for non-commercial loss purposes is less than $250,000.

In your case, the income requirement under subsection 35-10(2E) is not met as your income for non-commercial loss purposes was above $250,000.

Although your business activity is a primary production business, it does not meet the exception at subsections 35-10(4) as your assessable income from other sources is greater than $40,000.

If the income requirement is not met, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise discretion for the income years in question where but for the special circumstances:

•         your business activity would have made a tax profit

•         the activity passes at least one of the four tests or,

•         but for the special circumstances, would have passed one of the four tests.

Paragraph 12 of TR 2007/6 states the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income years in question where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Paragraph 35-55(1)(a) refers to 'special circumstances outside the control of the operators 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.

Paragraph 54 of TR 2007/6 states that the use of the word 'including' in paragraph 35-55(1)(a) 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.

Paragraph 55 of TR 2007/6 states, for these other kinds of events, the operators of the business activity must show that the special circumstances were outside their control.

Special Circumstances

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.

Paragraph 41B of TR 2007/6 states, access to the special circumstances limb is not limited to those individuals who satisfy the income requirement. Individuals who do not meet the income requirement, but who can demonstrate their business is commercial, and has been affected by special circumstances, may also be considered under the special circumstances limb.

Paragraph 41C of TR 2007/6 states, for a business activity to be regarded as 'commercial' for the purposes of Division 35 four objective tests are provided, at least one of which must be satisfied, or would have been satisfied but for the special circumstances. These tests are:

•         Assessable income test (section 35-30)

•         Profits test (section 35-35)

•         Real property test (section 35-40)

•         Other assets test (section 35-45).

It is necessary for the special circumstances to be outside the control of the operators of the business activity. As discussed in paragraph 14 of TR 2007/6, failure for no adequate reason to adopt practices commonly used in an industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator.

In addition, paragraph 15 of TR 2007/6 states, that the discretion can be exercised in years after the one in which the special circumstances occurred if the special circumstances continue to prevent the business activity from satisfying any of the tests in those years. However, there may be situations where the special circumstances, because of their continued existence, become the ordinary or usual situation. It would not be appropriate to exercise the discretion once this occurs.

A decision to apply temporary full expensing is not a special circumstance, as it is not outside the control of the business operator.

Application in your circumstances

You do not satisfy the income requirement in subsection 35-10(2E).

Having regard to your circumstances and the principles set out in TR 2007/6 it is accepted the 'special circumstances limb' paragraph 35-55(1)(a), has been satisfied.

You have satisfied the real property test and the other assets test.

You have been a farmer since 19XX and have made a profit for X out of X years since 20XX.

You have spent hundreds of thousands of dollars on plant and equipment and buildings over the last XX plus years which indicates that you have the intention of making a profit from this business

You provided a list of specific reasons showing that you have been impacted by special circumstances that have caused your business loss.

Consequently, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) to allow you to include the loss from your business activity in the calculation of your taxable income for the years ended 30 June 20XX, 30 June 20XX, 30 June 20XX, 30 June 20XX and 30 June 20XX.

Your request to exercise the discretion indefinitely cannot be granted as any circumstance that continue to exist indefinitely are not 'special' but have become the ordinary business conditions.