Private ruling: non-commercial losses
Published: July 2011
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2001

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your mixed farming activity in your calculation of taxable income for the financial years ending 30 June 2010 to 30 June 2011? | A1: No.

Relevant facts and circumstances: You run two separate farm enterprises in partnership on land acquired by, and leased from, a related entity. The two properties are approximately X hours apart .The first property was acquired in 20XX and run as a grazing enterprise The second property acquired in 20XX produces wool from sheep, as well as some other functions. Since acquiring both properties you have endured a drought and cyclical lows in wool prices. Prices for the wool have been below the cost of production for much of this time. Stock numbers were reduced and additional fodder purchased. Whilst those costs are short term, the reduced income continues until stock numbers can return to pre-drought levels by natural increase. A significant amount of expenditure has been incurred in improving existing infrastructure. For example, capital has been put into the business to double the water storage to future drought proof the property. A new linear irrigation and the associated infrastructure have been installed to increase cropping capacity and a program of pasture renovation is underway. Fencing on both properties, whilst adequate, was not adequate to cope with wildlife browsing which has increased significantly at both properties. An agriculture consultant reports that dryland grazing has a short lead time with returns achieved within a year of starting the enterprise. However, also advises a delay of at least 3 years to achieve profitability from grazing operations would not be unusual and at least 5-8 years from investments in irrigation. You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income is more than $250,000.


Reasons for decision: Summary: Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements. for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years: (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C). The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied 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 is above $250,000. The period that is commercially viable for the industry concerned is taken from the commencement of the activity. Therefore your activity commenced when the first property was purchased in 20XX. The purchase of the second property does not alter or recommence the time that your activity began. The objective evidence you have provided show the commercially viable period to make a tax profit for your type of activity is three years. Therefore a profit would have been expected in the 20XX-XY financial year, one year before drought affected your area. Your profit and loss projections predict a profit will be made in the 2011-12 financial year, many years after the commencement of your activity and a number of years outside the period that is commercially viable for your industry. The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

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