Private ruling: Non-commercial loss - commissioner's discretion - lead time
Published: April 2015
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business in your calculation of taxable income for the relevant financial years? | A1: Yes.

Relevant facts and circumstances: You carry on a business of growing an organic produce. You purchased the maximum number of organic seed available to you for planting during the first year of operation. At least 50% of the seed stock was of inferior quality, which impacted on the amount and quality of seed stock available for replanting after the first harvest. Whilst in the first year the seed only yielded a small weight gain, it did provide much more seed for planting. It also reduced the inferior quality stock in your crop. During the following years you focused on increasing the seed and reducing the inferior quality of the seed stock, and then the size of the produce. After three years you had only about 20% inferior quality seed stock. You provided independent evidence stating that it may take three to four years for a farm to grow and replant seed stock to reach a small commercial crop. However as you aim to grow organic produce, you believe the lead time is longer due to inferior seed stock you started with and your inability to use pesticides (therefore weeds compete with the plants). Your projected income and expenditure shows expected assessable income of more than $20,000 and a taxable profit in the 2015-16 financial year. Your income for non-commercial loss purposes is less than $250,000 for the relevant financial 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)(b)

Reasons for decision: Summary: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you satisfy the income requirement and you pass one of the four tests • the exceptions apply; or • the Commissioner exercises his discretion. You have requested the Commissioner to exercise his 'lead time' discretion for the 2011-12 to 2014-15 financial years so that you are not required to defer any losses from your primary production business activity under the non-commercial loss provisions. The 'lead time' discretion may be exercised for the income years 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; and • there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that you will pass one of the four tests or make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business in your calculation of taxable income for the relevant financial years.