Private ruling: Non-commercial losses - Commissioner's discretion
Published: November 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

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 business activity in your calculation of taxable income for the 2013-14 income year? | A1: Yes.


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)(c).

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. To satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997, your income for non-commercial loss purposes must be 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 2012-13 income year. The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the income year where he is satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. In your case, the nature of your business means that when you acquired the property, the value placed on the crop becomes a deductible amount against the sale of the crop in that year and you will also incur all the expenses for growing the next years crop in that year. It is inherent in this industry that in the first year, when you purchase a going concern with a crop on the trees, there will be double expenses and only one crop sales income, in that year. This will cause a loss in that year. Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater than the expenses attributed to it. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business activity for the 2013-14 financial year.

Relevant facts: You purchased a property as a going concern. The contract shows a price breakdown, with the land value and the growing crop. | Your income for non-commercial loss purposes is $250,000 or more. | The property is in good condition and suitable for the crops grown. | You expect to make a profit in the 2014/15 income year and each year afterwards. | You have provided a letter from an independent source outlining the suitability of the property for growing crops. | The crops are harvested in the June/July/August period. Income may not be received until sometime later depending where the crop is sold. | In the 2013/14 year you incur the expense of purchasing the crop on the trees as well as the expenses of growing the new crop. There will be only income from one crop harvest in that year.