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

Ruling: Q1: 1. 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 20XX-XX to 20XX-XXfinancial years? | A2: 


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). | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

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 is above $250,000 in the 20XX-XX and 2010-11 financial years and you expect this will be the case in the 2011-12 to 20XX-XXfinancial years as well. | Detailed Reasoning - Commissioner's discretion - special circumstances: 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. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. Your business activity was affected by a weather event in the 2005-06 financial year. It is accepted that the weather event was outside were outside of your control and is '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. You have provided actual and projected livestock numbers and income and expenditure figures for the 2006-07 to 2010-11 financial years. Both actual and projected livestock numbers start the 2006-07 financial year with the same figure, that being your actual position after the weather event of the 2005-06 financial year. Your projected figures show how, from this starting position, the business activity could have become profitable by the 20XX-XX financial year. Therefore, the Commissioner is not satisfied that the 2006 weather event was the cause of your business losses in the 20XX-XX and 2010-11 financial years. You have stated that the region was drought affected in 2009, due to 3-5 months of little or no rain. It is generally accepted that drought conditions are outside the control of business operators and are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. There is no evidence that the region has ever been drought declared. No rain for several months is a common feature of the weather patterns in that region. The data provided from the Bureau of Meteorology website shows the rainfall figures for the 20XX-XX and 20XX-XX financial years are comparable with earlier years. Therefore, the Commissioner is not satisfied that your activities were affected by drought in the 20XX-XX of 20XX-XX financial years. One of the properties experienced flooding in 2008 and 2010 with a disaster area being declared. The property suffered damage to fences and the property entrance, as well as erosion in major paddocks. It is accepted that the flooding events 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. The maximum annual income from this property is approximately $60,000 and the annual running costs are approximately $XX,000, excluding interest. This property is currently running at full capacity. Although you have not provided specific details of the effects of the flooding events on your overall business income and expenditure in these years, your actual livestock sales in the 20XX-XX financial year were double that of the previous year. Your losses in the 20XX-XX financial year were almost $XXX,000, so even if the flooding event reduced your income from the property by the full $XX,000, your business losses would still have been around $xx,000. You have also stated that the property is currently at maximum capacity which indicates that it has now recovered from flooding events. The Commissioner is not satisfied that your activities would have made a profit in the 20XX-XX and 2010-11 financial years, or would have been expected to make a profit in the 2011-12 to 20XX-XXfinancial years, had it not been affected by these flooding events. In the 2010-11 financial year, you state that your business was again affected by a weather event which resulted in stock losses and property damage. As stated above, it is accepted that weather events are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. There is no evidence that your business activity was affected by the weather event you describe. Taking into account the affects of each of the events discussed, individually and as a whole, on your business activities, the Commissioner is not satisfied that, but for these events, your activities would have produced a profit. Therefore, 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 activities for the 20XX-XX to 20XX-XXfinancial years. | Detailed Reasoning - Commissioner's discretion - commercially viable period: The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. In your case, you have provided income and expenditure projections showing your business activity could have become commercially viable by the 20XX-XX financial year, or within four years of the weather event in the 2005-06 financial year. As already discussed above, the Commissioner is not satisfied that your business activity was unduly affected by 'special circumstances' during this four year period. Your livestock projection figures show that from your actual position in 2006-07 to the end of 20XX-XX, your livestock numbers should have increased by almost 2,000 head. Your actual figures for the same period, from the same starting position, to the end of 20XX-XX, show an actual increase of around 700 head. The only intervening event during this period was flooding on one of your properties. The full carrying capacity of this property is approximately 400 head while the difference between your actual and projected livestock figures total almost 1,200. It is generally accepted that under normal conditions natural increase annually will usually be around 95% of breeding stock. However, you have stated that the harsh conditions in the regions where your properties are situated mean that a more realistic forecast is 45-50% of breeders reproducing in any given year. You have cited an independent source which states that reproduction is probably the single most important factor affecting the economics and profitability of your business activity. In your projected livestock figures, a natural increase rate of between 40-50% of livestock numbers each year would result in the business being profitable by the 20XX-XX financial year. Your actual figures for 2006-07 to 2010-11 financial years show a natural increase rate of between 9-11% of livestock numbers each year, with the exception of 2009 where the rate was around 65%. Your projected income figures for the 20XX-XX and 2010-11 financial years are based on you receiving an average of around $525 per head. Your actual income figures show that the average price received per head in the 20XX-XX and 2010-11 financial years was between $370 and $480 per head. The low actual reproduction rates along with lower prices received for your livestock would indicate that your projected figures, while desirable, may not have been achievable even in ideal circumstances. The reason your activities made a loss in the 20XX-XX and 2010-11 financial years, and is expected to continue to make a loss in the 2011-12 to 20XX-XXfinancial years, is due to: the low reproduction rates of your livestock, which you state is, in part, due to the harsh conditions in the regions where your properties are situated; and your high interest expenses. This is peculiar to your situation and is not inherent to the nature of the business. Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 20XX-XX to 20XX-XXfinancial years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | 2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production business in your calculation of taxable income for the 20XX-XX to 20XX-XXfinancial years? | Relevant facts: You commenced your primary production business activity in 2004. | Your business is conducted over three properties across two states. | Your current borrowings for the purchase of the three properties are high and cost approximately $xxx,000 per annum in interest payments. | In the 2005-06 financial year, your business activity was affected by a weather event. You have stated that you had livestock losses, as well as damage to fences and farm buildings, as a result. | You believe lead time was reset to allow time to re-establish breeding numbers. | You have provided projections for the 2006-07 to 2010-11 financial years showing that, from your actual livestock position in 2006-07, with a natural increase at a rate of between 40-50% of livestock numbers each year, the business could have become profitable by the 20XX-XX financial year after the weather events of 2006. | You have stated that the region was drought affected in 2009, due to 3-5 months of little or no rain, as shown on the Bureau of Meteorology website. You have stated that these conditions resulted in the loss of livestock and other income opportunities in 2010. | One of the properties experienced flooding in 2008 and 2010 with a disaster area being declared. The property suffered damage to fences and the property entrance, as well as erosion in major paddocks. No government assistance was available to you due to your high income level. | The maximum annual income from this property is approximately $60,000 and the annual running costs are approximately $xx,000, excluding interest. This property is currently running at full capacity of approximately 400 head. | Prior to the weather events, you estimated that income from the properties would be sufficient to meet property related expenses and debt commitments within four years with no further external cash injection requirements. | Your actual figures for 2006-07 to 2010-11 financial years show a natural increase rate of between 9-11% of livestock numbers each year, with the exception of 2009 where the rate was 64%. These figures also show that your business activity produced a loss of almost $150,000 in the 20XX-XX financial year and almost $xxx,000 in the 2010-11 financial year. | You have stated that it is generally accepted that well-nourished breeders can produce one offspring per year. However, the harsh conditions in the regions where your properties are situated mean that a more realistic forecast is 45-50% of breeders reproducing in any given year. | You project that your business activity will not produce a tax profit until the 2014-15 financial year. | Your income for non-commercial loss purposes in the 20XX-XX and 2010-11 financial years was above $250,000, and you expect this will be the case for the 2011-12 to 20XX-XXfinancial years as well.