Private ruling: Non-commercial losses
Published: May 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner 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 activity in your calculation of taxable income for the 2010-11 and 2011-12 financial years? | A1: No

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 out a primary production business primarily concerned with the growing of sugarcane. The business is currently operated by three entities in partnership with contract staff employed from time to time. You purchased an existing cane farm in a run down state with the percentage of cane being past the age of high productivity. You have operated the cane farm since its purchase and harvested on crop in the 2010 calendar year. You have submitted independent evidence that states sugarcane usually grows for 9-16 months before being harvested. You submit this affected the growing crop, the soil and the climate conditions of the farm. Sugarcane was replanted once the conditions became suitable. You do not expect the farm to reach full capacity until the 2012-13 financial year. You do not expect to make a tax profit until the 2015-16 financial year.

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: Summary: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 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. In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control. '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. 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 Employment, Education, Training Youth Affairs, Department of v. Barrett (1998) 82 FCR 524; (1998) 27 AAR 291; (1998) 52 ALD 499; (1998) 3SSR 38 '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 Beadle Director-General of Social Security, Re (1984) 1 AAR 362; (1984) 6 ALD 1 at 3: 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. In your case the Commissioner does not accept that your business was affected by special circumstances in relation to the weather conditions associated with above average rainfall in the 2010 year. You have provided insufficient evidence to indicate that the weather conditions that affected your property were unusual, uncommon or exceptional. We consider the weather conditions sited to be more akin to seasonal fluctuations that could reasonably be expected to occur when operating a primary production business. Furthermore, even if the Commissioner accepted that your business was affected by special circumstances, which he does not, the following considerations lead us to believe that had the adverse weather conditions not occurred the business still would have returned a loss. You purchased a going concern in the 2009-10 financial year. The property was purchased in a run down state with the percentage of cane being past the age of high productivity. You expect the business to reach full capacity in the 2012-13 financial year however you do not expect to make a tax profit until years later. It would be expected that if it was only the adverse weather conditions that caused your primary production business to make a loss, then it would have made a profit in the years when the property had reached full production or indeed in the harvest prior to the onset of the adverse weather conditions. In conclusion, the sheer magnitude of losses in relation to income indicates that your business would have remained unprofitable under favourable weather conditions. In summary, the Commissioner is not satisfied that the adverse weather conditions constitute special circumstances or that you would have made a profit in the 2010-11 and 2011-12 financial years but for these adverse conditions. Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for those years.

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