Private ruling: NCL - Commissioner's discretion - Special circumstances.
Published: July 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Background | You requested private rulings with regards to your primary production activity previously. The Commissioner did not exercise the discretion in paragraph 35-55(1)(a) and 35-55(1)(b) of the ITAA 1997. | Subsequently you provided new information and requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997.

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 activity in your calculation of taxable income for the 2009-10 and 2010-11 income years? | A1: Yes | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2011-12 income year? | A2: No

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are the application for private ruling and all supporting documentation and the documents submitted for the previous private rulings. You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. You purchased a property to conduct a primary production activity. You registered the activity as a business in the 1996 year. You conducted the necessary tests prior to commencing the activity and built the infrastructure required for the activity. You also applied and received the necessary classifications from the district council and other licences from the relevant authorities. You commenced the primary production activity and developed it in stages. Few years later you received a tax profit. You submit that your business was affected by various unavoidable circumstances. Therefore, you were unable to receive profits in the 2009-10 to 2011-12 income years. You have provided independent evidence of most of the circumstances that affected your activity. You have explained the effects of those circumstances and have demonstrated that had it not been for those circumstances you would have received profits in the relevant income years.

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: Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless: · the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies, or · subsection 35-10(2E) of the ITAA 1997 is satisfied for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or · the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain 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. In your case, you did not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 in the 2009-10 and 2010-11 income years and you do not expect to satisfy the income requirement in the 2011-12 income year. Your primary production activity will only be potentially subject to these provisions if it is carried on as a business. The Commissioner is satisfied that your activity is carried on as a business. Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of the Commissioner's discretion as follows: The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because: (a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or …… The Note to paragraph 35-55(1)(a) of the ITAA 1997 states that the particular paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances. Paragraph 41D of the Taxation Ruling TR 2007/6 explains that for individuals who do not satisfy the income requirement, the factors that must be satisfied before deciding whether to exercise the special circumstances limb of the discretion for an income year are that: · the business activity is affected by special circumstances such that it is unable to produce a tax profit; and · the business activity either satisfies at least one of the tests or is affected by special circumstances such that it is unable to satisfy any of the tests; and · the special circumstances affecting the business activity are outside the control of the operators of the business activity. Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters. 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 Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 '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 Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1: 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. It can be seen that to determine what is 'special circumstances', we need to look at the context in which the phrase is used. Also, it is clear that 'special circumstances' will be something out of the ordinary or unusual. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. Paragraphs 48 and 49 of Taxation Ruling TR 2007/6 expand upon the events that can be accepted as 'special circumstances' and explains that it is not limited to natural disasters. In particular, paragraph 49 details some indicators of the affects on the business activity that could lead to the exercise of the discretion. Some of these indicators are: · Destruction of stock or equipment. · Delays in ploughing, planting, harvesting etc. · Delay in growth of crops. · Inability of operator to perform duties, and · Loss of business opportunities. | Detailed Reasoning - Commissioner's discretion in paragraph 35-55(1)(a) for the 2009-10 and 2010-11 income years: To consider the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the activity was affected by special circumstances outside the control of the operators of the business activity. In the 2006-07 income year your activity was affected by unavoidable circumstances beyond your control. These circumstances reduced your income in the 2007-08 income year. In 2006-07, 2007-08 and 2008-09 income years your activity was affected by natural disasters. These affected your income in the 2007-08 to 2010-11 income years and to a lesser amount in the 2011-12 income year. You have provided evidence to confirm that the activity was affected by the unavoidable circumstances. You have provided projections to show that you would have received a profit in the 2009-10 and 2010-11 income years had it not been for the unavoidable circumstances. Based on the information provided, the Commissioner is satisfied that: · the business activity was affected by special circumstances such that it was unable to produce a tax profit in the 2009-10 and 2010-11 income years; and · the business activity satisfied at least one of the tests in Division 35 of the ITAA 1997 (the assessable income test in section 35-30 of the ITAA 1997); and · the special circumstances affecting the business activity were outside your control. Accordingly, the Commissioner is satisfied that it would be unreasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your primary production activity for the 2009-10 and 2010-11 income years. This means that the losses from those years can be claimed in the years they arise. | Detailed Reasoning - Commissioner's discretion under paragraph 35-55(1)(a) for the 2011-12 income year: The projections you have provided indicate that your income for the 2011-12 year will be reduced due to the effects of the unavoidable circumstances but to a much lesser amount compared to the estimated income for the previous two years. As per the income and expenditure statement, even if the lost income is not considered, you expect to receive a tax profit in the 2011-12 income year. The estimates you provided for the 2011-12 income year appears to be reasonable, based on the facts you have provided with regards to the unavoidable circumstances. Those circumstances have affected your activity mainly in the years prior to the 2011-12 income year. Therefore the Commissioner is satisfied that the activity is capable of generating a profit in the 2011-12 income year not taking into consideration the income lost in the 2011-12 income year. In view of the above, the Commissioner is precluded from exercising the discretion for the 2011-12 income year. The loss deferral rule in Division 35 does not apply when a tax profit is made. | Detailed Reasoning - Other circumstances that affected your activity: You have stated that other circumstances also affected your activity Whilst we accept that some of those circumstances were not within your control, we consider them to be normal occurrences in your industry and not something unexpected. These situations can be reasonably expected to occur when carrying on any business activity. With regards some circumstances, you have not provided sufficient evidence to confirm that the it has directly affected your activity and that it prevented the activity from generating any profits. | Detailed Reasoning - Summary of reasons for decision: The Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 and 2010-11 income years. For the above income years the rule in subsection 35-10(2) of the ITAA 1997 will not apply to defer to a future income year any loss that arise from your primary production activity. Accordingly, you are entitled to claim the losses incurred in your primary production activity for the 2009-10 and 2010-11 income years. The Commissioner's is precluded from exercising the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the 2011-12 income year.

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