Private ruling: Commissioner's discretion - special circumstances
Published: February 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
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 activities in your calculation of taxable income for the 2010-11 and 2011-12 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 2010-11 financial year and you expect this will be the case in the 2011-12 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. In your case, your farming activities have suffered as a result of drought and, more recently, floods. 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 drought and flooding adversely affected your livestock fertility levels through poor nutrition and urea in the feed supplements. In recent years, your sales figures have reached budgeted amounts, but in the 2010-11 financial year, these figures were greatly reduced due to special circumstances. Based on your actual expenditure figures for the 2010-11 financial year, had your activities achieved the budgeted amounts your activities would have produced a profit. You now expect your activities will produce a tax profit in the 2012-13 financial year. The Commissioner is satisfied that your activities would have made a profit in the 2010-11 financial year, and would have been expected to make a profit in the 2011-12 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 2010-11 and 2011-12 financial 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. | Relevant facts: You have conducted your primary production business activity for more than 30 years and you work and live on the farm. | During the past few years, your farming activities have suffered as a result of drought and, more recently, floods. | The drought caused the degradation of nutrients in the grazing land and, as a consequence, supplementary feeding was required which increased feed costs. The poor nutrition and urea in the feed supplements led to lower fertility rates which, in turn, affected your livestock breeding program in later years. | The flooding that followed the drought further reduced nutrients in the soil, due to leaching, which again adversely affected fertility rates. | You had budgeted for income levels of over $500,000 in the 2010-11 financial year, before the weather events, which would have produced on overall profit. Your actual income figures for the year were less than $300,000 and your actual expenditure for the year was approximately $475,000. | In recent years, your sales figures have reached budgeted amounts. The affects of the drought and subsequent flooding on fertility rates reduced income levels in the 2010-11 financial year and this will be the case for the 2011-12 financial year as well. | Your income for non-commercial loss purposes in the 2010-11 financial year was above $250,000 and you expect this will be the case for the 2011-12 financial year as well.