Private ruling: Commissioner's discretion - special circumstances
Published: November 2013
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: 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 business in your calculation of taxable income for the 2010-11 financial year? | A1: Yes.

Relevant facts and circumstances: You commenced your primary production business activity in 19XX. The region where your property is located had been affected by drought for an extended period and these conditions did not begin to ease until 200X. During the drought period, dams dried up and grass ceased to exist in paddocks and much of your livestock was sold. Since the drought has eased, you have been rebuilding your livestock numbers. Your livestock numbers over recent years have continued to increase. In the 20YY financial year no livestock sales were recorded and the activity produced an overall loss. However, projections provided show that, as numbers increase, you expect this activity will produce a profit in the relevant financial year. Your income for non-commercial loss purposes in the 20YY financial year was above $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a).

Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000 in the 20YY financial year. 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 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 activity had been affected by drought for an extended period and these conditions did not begin to ease until 20ZZ. It is accepted that these conditions were outside your control and are '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 special circumstances that caused your activities to make a loss. Since the drought has eased, you have been rebuilding your livestock numbers. In the 20YY financial year no livestock sales were recorded and the activity produced an overall loss. However, projections provided show that, as livestock numbers increase, you expect this activity will produce a profit in the relevant financial year. The Commissioner is satisfied that your activities would have made a profit in the 20YY financial year had it not been affected by these special circumstances. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 20YY financial year.