Private ruling: Commissioner's discretion
Published: October 2011
Ruling period: Year ended 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 June 2009

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 2009-10 to 2013-14 financial years? | A1: 

Relevant facts and circumstances: You operate a specific primary production activity. You commenced business in the 1990's. You have made losses for a number of years. You submit that for average rainfall has been below average for a number of years. You have submitted evidence in relation to the decline in income and prices since deregulation in your industry. You also have presented evidence as to the variability of prices. Your labour costs are in excess of the average farm in Australia as there is little family labour input. You purchase large amounts of fodder due to insufficient labour and income to allow on-farm irrigation and production of your own fodder. You anticipate a small profit if prices exceed current levels. You anticipate a decrease in fodder costs with the return to more average rainfall patterns and better use of irrigation. Your income from non commercial losses is in excess of $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(a) | Income Tax Assessment Act 1997 paragraph 35-55(1)(b) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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 · the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity. 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. Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling: Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' as including drought, flood, bushfire or some other natural disaster. 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. Some indicators of the effects on the business activity that could lead to the exercise of the discretion in regard to the special circumstances limb are: · destruction of stock or equipment · delays in ploughing, planting, harvesting; · delay in growth of crops; · inability of operator to perform duties; and · loss of business opportunities In the situation where a business activity would have failed to satisfy a test even if the special circumstances had not occurred, it is unlikely that the Commissioner would consider it to be unreasonable for the loss deferral rules to apply and therefore the Commissioner would be unlikely to exercise the discretion. In your case you operate a primary production activity which has been operating at a loss for a number of years. You contend that you business losses are attributable to: · deregulation of your industry causing a decline in prices · higher than average labour costs · increased fodder costs as you lack the income to produce your own fodder or irrigate · below average rainfall and periods of drought from 2005 to 2008 It is accepted that market deregulation resulting abnormal market fluctuations could potentially be considered 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 drought that caused your activities to make a loss. Considering the magnitude of your losses in relation to total income received for the produce it is unlikely that you would have made a profit even at your future predicted price. Your predicted future price is also a lot higher than average historical prices received. As such the prices received for your produce that you have supplied cannot be said to have caused your activities to make a loss. You have also submitted that increased fodder and labour costs contributed to your loss. These factors are unique to your situation and the way you chosen to carry on your business operations and as such are subjective and impermissible considerations and cannot be used as a basis for the Commissioner to grant his discretion. Additionally you have submitted below average rainfall and drought as contributing to your business losses. Whilst we accept that drought can be considered special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997, based on the evidence provided the Commissioner is not satisfied that your activities would have made a profit but for the unfavourable weather conditions. Therefore, as you have not shown that special circumstances have prevented you from making a tax profit the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your primary production activities.

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