Commissioner's discretion contained in section 35-55 of the Income Tax Assessment Act 1997

Will the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the taxpayer, an individual, to include a loss from a cut flower business activity in the calculation of the their taxable income for the year ended in which the loss arose?

Yes, the Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 to allow the taxpayer, an individual, to include a loss from a cut flower business activity in the calculation of the their taxable income for the year ended in which the loss arose. The Commissioner is satisfied that the business activity was affected in the income year in question by special circumstances outside the control of the operator of the business activity and were it not for these circumstances the activity would have satisfied one of the tests in Division 35 of the ITAA 1997.

The taxpayer ceased a cut flower activity ('the activity') during the income year ended 30 June 2001.

The activity ceased as a result of root rot infecting the entire plantation. To eradicate the disease from the property, destruction of the trees by removal and burning was undertaken. Consequently, the activity produced a 'loss' for the income year ended 30 June 2001. [Note: 'loss' refers here to the excess of the allowable deductions attributable to the activity over any assessable income from it.]

The taxpayer provided projections including supporting evidence indicating that if the activity had not ceased it was expected to produce assessable income of at least $20,000 during the year ended 30 June 2001 and hence meet the Assessable income test in section 35-30 of the ITAA 1997.

The activity had commenced and was carried on by an individual taxpayer as a business in the income year ended 30 June 2001, so a loss made from it is potentially subject to the provisions in Division 35 of the ITAA 1997. The activity however does not meet any one of the four tests in Division 35 for the income year ended 30 June 2001 and the Exception in subsection 35-10(4) of the ITAA 1997 does not apply.

Nevertheless, the taxpayer demonstrated that there was a reasonable expectation that the activity would have passed one of the tests set out in Division 35 of the ITAA 1997 for the income year ended 30 June 2001 had it not been for the special circumstances.

The loss made from the activity in that year is therefore subject to the loss deferral rule in subsection 35-10(2), unless the Commissioner decides under paragraph 35-55(1)(a) of the ITAA 1997 that it would be unreasonable for this rule to apply.

The discretion in paragraph 35-55(1)(a) of the ITAA 1997 can only be exercised where a business activity was or will be affected in one or more income years by special circumstances outside the control of the operators of the business activity. This paragraph is intended to provide for a case where a business activity would have passed one of the tests in Division 35 of the ITAA 1997 if it were not for the special circumstances.

The root rot circumstances were 'special', in the sense of being sufficiently detrimental to the activity, and 'out of the course' of events that might be expected ( Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett & Anor (1998) 52 ALD 499; (1998) 82 FCR 524).

It is therefore accepted that the activity was affected in the income year ended 30 June 2001 by special circumstances outside the control of the taxpayer and but for these circumstances the activity would have passed the Assessable income test in section 35-30 of the ITAA 1997.

The Commissioner therefore is satisfied that the requirements of paragraph 35-55(1)(a) of the ITAA 1997 have been met and it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 to defer the deduction for the loss from the activity.