Private ruling: Non-commercial losses
Published: April 2012
Ruling period: Year ended 30 June 2010 Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 September 1987

Ruling: 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 primary production business primarily. The business has been operating for over 50 years. You personally have operated the business for over 20 years. You submit that for the years 2004-05 to 2009-10, abnormally low rainfall resulted in severely reduced crop yields for the area. The average rainfall for the year may have been near the annual average but during the critical growing season of May to October the rainfall was considerably down. The business last made a profit in the 2001-02 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: 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 income 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. The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation: Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course. Later, in the Federal Court Case of Employment, Education, Training Youth Affairs, Department of v. Barrett (1998) 82 FCR 524; (1998) 27 AAR 291; (1998) 52 ALD 499; (1998) 3SSR 38 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that: The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course. Tamberlin J then quoted the following passage with approval from the AAT case of Beadle Director-General of Social Security, Re (1984) 1 AAR 362; (1984) 6 ALD 1 at 3: An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special. In your case the Commissioner does not accept that your business was affected by special circumstances. Without proof that the land on which your business operates was drought declared we are unable to conclude that the adverse weather conditions you have cited are anything but normal seasonal fluctuations that could be reasonably expected to affect a primary production business. Nevertheless, even if the Commissioner had accepted that your business was affected by special circumstances, this is not sufficient. You would also need to show that it was the special circumstances that caused you to make a loss. You have stated that your primary production business losses for the 2004-05 to 2009-10 financial years were due to abnormally low rainfall during the critical growing season. Obviously the extent of the losses during this period has been contributed to by the adverse weather conditions. However, it is noted that in the 2002-03 and 2003-04 financial years, the area in which your primary production business is situated experienced normal rainfall. However, your business still returned losses. It would be expected that if it was only the drought that caused your primary production business to make a loss, then it would have made a profit in the years preceding when normal rainfall was experienced. Furthermore, the losses experienced in the 2010-11 financial year are considerably higher than those experienced in 2009-10, more than double. If the losses were attributable to adverse weather conditions in past years you would expect that the financial position of the business would improve rather than worsen once conditions had improved. The Commissioner is not satisfied that the adverse weather conditions constitute special circumstances or that you would have made a profit in the 2009-10 to 2012-13 financial years but for these adverse conditions. Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised for those 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. | Subject: Non-commercial losses: 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 2009-10 to 2012-13 financial years?