Private ruling: Commissioner's discretion for special circumstances
Date of advice: 26 May 2017
Published: September 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 20XX financial year? | A1: Yes

Relevant facts and circumstances: You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business on a property (the property). You became the sole registered owner of the property in June 19XX. In 19XX your child took over the management of the property and remained in that position until 20XX. Tax profits have been made in XX of the last XX years. The property suffered substantial droughts which prevented the business from making a profit in the 20XX to 20XX financial years. From 20XX your health deteriorated significantly. You were concerned about what your family's future would be post your death, as a substantial part of your wealth was tied up in the property. The property represented a significant portion of your total asset pool and estate. As a result of this you were not in a position to simply give the property to your child in its entirety. This would have resulted in an inequitable split of assets between your spouse and children. In 19XX you granted your child an option to purchase the property if you ever decided to sell it. Your child refused your offer. In late 20XX you wrote to your child to explore whether they were interested in purchasing the property. You received a response from your child in early 20XX that caused great offence and as a result of this you decided to sell the property, requesting formal valuation of the property be performed by an independent valuer. From this point forward, family relations deteriorated especially between you and your child. On two more occasions you wrote to your child requesting their interest in purchasing the property. Both times your offer was refused. In mid 20XX your child lodged a caveat on the titles that comprise the property. In early-mid 20XX your child lodged a further caveat over the title of the various water rights owned by you which facilitated the provision of water for the farming activities undertaken on the property. The basis for the lodgement of the caveat of the property titles and water rights was that your child argued that you held the property on behalf of them, under a constructive trust and/or your child had some other equitable interest and entitlement in the property. You commenced Proceedings in late 20XX. The basis of the Proceedings instigated that you were the sole owner of the property and your child had no beneficial interest in it as claimed in the caveats. You requested that the caveats be removed and for your child and their family to vacate the property. The impact of the caveats being placed on the property was severe and is outlined below: ● You and any family members were unable to physical gain access to the property ● You and any family members were unable to inspect the property, the farming operations or the well-being of the livestock ● You were unable to have third party advisers/contractors inspect the property or farming operations ● You were unable to make business decisions affecting the farming operations and property without inspecting it ● You did not receive any financial updates from your child who was previously responsible for the day to day financial management and accounting functions ● The property and farming operations deteriorated and as a result, profitability declined ● You were unable to commence the sale process of the property ● The physical state of the property declined ● The well-being of the livestock declined You and your child entered into a mediation process which took place on DDMMYY. As a consequence of the mediation, you settled the Proceedings and the Deeds of Settlement were signed by both parties on DDMMYY. The settlement stipulated that your child was to leave the property in a state upon exit, with no material damages. Upon inspection post their departure, this was not the case and material damage to the property had occurred. The disruption of the mediation and Settlement completion all occurring during the 20XX financial year impacted substantially on the financial performance of the property. The lack of attention that was paid to the property and the farming operations by your child during this time made it impossible for the property to operate in any normal capacity during the excluded year and therefore substantial losses arose. Your business has been profitable in the previous two financial years. You submit that you were affected by special circumstances in the 20XX financial year. But for the special circumstance, the business would have made an estimated profit of $XX in the 20XX financial year.

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

Reasons for decision: Summary: 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. 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 ● the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests. Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control. Further, it is accepted that: ● but for the special circumstances, you would have made a tax profit ● you have met one of the four tests or would have but for special circumstances. Consequently the Commissioner will exercise his discretion in the 20XX financial year.