Private ruling: Commissioner's discretion for special circumstances
Date of advice: 21 August 2017
Published: December 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

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 activity in your calculation of taxable income for the 2015-16 financial year? | 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 on a business in partnership with your spouse The business is primarily concerned with breeding stock. You commenced business operations in the 20XX-XX financial year. You submit that you were affected by special circumstances in the 2015-16 financial year. You have submitted the following evidence to substantiate your claim: ● Government drought assessment information You submit that the special circumstances impacted on the profitability of your business in the following ways: ● There was a reduction in sales volumes due to a decrease in price per head of stock ● Additional land had to be purchased in to move stock onto to reduce the wear on the main property ● You were required to pay agistment costs for stock at several other properties ● You were required to purchase additional fodder to supplement the feed available on the land ● On top of the drought conditions you are currently experiencing, your region was directly impacted by a severe weather event in 2015. You are still recovering from the damages caused by the event and you have had to outlay additional funds to repair the damages caused by the event You have provided a projected profit and loss statement that suggests that had the special circumstances not occurred, the business would still have produced a loss in 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: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. 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 financial 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. Taxation Ruling TR2007/6, at paragraph 13A, advises that for individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances: ● your business activity would have made a tax profit, and ● the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. It is accepted in your case that the drought constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. Although your business activity has passed at least one of the four tests, both limbs of Paragraph 13A of TR 2007/6 are necessary for the Commissioner to exercise the discretion. You have advised that but for the special circumstances, your business would still have produced a loss in the 2015-16 financial year. Therefore the Commissioner is not satisfied that the special circumstances put forward prevented a profit being made, and consequently the discretion under paragraph 35-55(1)(a) of the ITAA 1997, cannot be exercised to allow you to offset your loss from your primary production business in the 2015-16 financial year.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for XXXX