Private ruling: Non-commercial business losses
Published: February 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your primary production activity in the calculation of your taxable income for the 2010-11 and 2011-12 financial years? | A2: 

Relevant facts and circumstances: You currently conduct a non primary production business. You also took out a loan to purchase a property in order to conduct a primary production activity in the 2008-09 financial year. Included in the purchase of the property was some livestock. The carrying capacity of the property is several hundred livestock. You project that the full carrying capacity of the property will be reached in either 2013 or 2014. Your income for non-commercial loss purposes was over $250,000 in the 2010-11 financial year. You state that the main reason for the failure of the primary production activity to make a tax profit is due to the large interest repayments you are required to make on the property loan. You state that you intend to sell the non primary production business and use the proceeds from the sale to repay the property loan. You expect to return a tax profit for the primary production activity in the 2012-13 financial year, as all interest repayments will have been finalised. You have provided details of livestock sales and purchases for the 2008-09 to 2010-11 financial years. You have provided detailed income and expenditure information of the primary production activity for the 2009-10 and 2010-11 financial years. No detailed projected income and expenditure information (apart from amount of livestock expected to be sold) has been provided for the 2011-12 and 2012-13 financial years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Paragraph 35-55(1)(c)

Reasons for decision: Summary: You have indicated that your primary production activity was carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you were, or will be, carrying on a business during the 2010-11, 2011-12 and 2012-13 financial years. | Detailed Reasoning - Non-commercial losses: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless: · you meet the income requirement and you pass one of the four tests · the exceptions apply · 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 do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. | Detailed Reasoning - Commissioner's discretion: The relevant discretion may be exercised for the income year in question where: · it is in the nature of your business activity that there will be a period before a tax profit can be produced · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. 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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as a consequence of starting out on a small scale, the hours worked, the level of debt financing or the need to build a client base In your case, you have stated that the main reason for the inability of the primary production business activity to make a tax profit is the large interest repayments you are required to make. You also state that the activity will not make a tax profit until your non-primary production business is sold and the proceeds are used to finalise the interest repayments. Therefore, the reason your primary production business activity is currently producing a loss is due to the level of debt financing undertaken to acquire the property, and is not inherent to the nature of the business activity. As it is considered that the loss is not inherent in the nature of the primary production business activity, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow you to deduct a loss in the 2010-11 and 2011-12 financial years. Accordingly, under Division 35 of the ITAA 1997, your losses must be deferred in these years. As you expect your primary production activity to make a tax profit in the 2012-13 financial year, the Commissioner cannot exercise the discretion for this year. | Detailed Reasoning - Deferred loss information: Where you cannot offset your business loss against any of your other assessable income in a financial year, your loss is simply deferred to future years. If your business makes a tax profit in a following year, you can offset the deferred loss against the amount of this profit.

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. | Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include losses from your primary production activity in the calculation of your taxable income for the 2012-13 financial year?