Private ruling: Commissioner's discretion - special circumstances
Published: May 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

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 2011-12 and 2012-13 financial years? | A1: 


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 20XX-YY financial year and you expect this will be the case in the next financial year as well. 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. In your case, the region where your farm is situated was affected by flooding. The flooding caused your farm to be inundated with water, with some paddocks under one metre of water. 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. The flood waters covered crops with an estimated value of approximately $90,000. In addition, the land has had to be redeveloped which resulted in extra costs being incurred in the 2011-12 and 2012-13 financial years. Your actual income and expenditure figures for the 2011-12 and 2012-13 financial years show overall losses of approximately $100,000 in total from the activity. It is reasonable to assume that had you been able to harvest the crops, and without the additional expenses, your business activity would have produced a profit in these years. The Commissioner is satisfied that your activities would have made a profit in the 2011-12 financial year, and would have been expected to make a profit in the 2012-13 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 2011-12 and 2012-13 financial years.

Relevant facts: You operate a primary production business. | In 20XX, the region where your farm is situated was affected by flooding. The flooding caused your farm to be inundated with water, with some paddocks under one metre of water. | The flood waters covered crops with an estimated value of approximately $XX,000. | The land has had to be redeveloped which resulted in extra costs being incurred in the 20YY-XX and 20XX-ZZ financial years. | Your actual income and expenditure figures for the 20YY-XX financial year show an overall loss of approximately $X1,000 from the activity. | Your actual income and expenditure figures for the 20XX-YY financial year, to 31 March 20ZZ, show a loss of approximately $X2,000. | You expect the property to be profitable in the 20**-** financial year. | Your income for non-commercial loss purposes in the 20YY-ZZ financial year was above $XX1,000 and you expect this will be the case for the 20YY-XX financial year as well.