Private ruling: non-commercial losses
Published: December 2011
Ruling period: Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2006

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 primary production activity in your calculation of taxable income for the 2010-11 to the 2012-13 financial years? | A1: 

Relevant facts and circumstances: In the 2000's you purchased a farming operation and some of their broodmares. Your intention was to carry on a fully commercial operation across all facets of farming. You spent a period of time sourcing new stock and carrying out improvements on assets and practices. You have gradually increased the quality and number of broodmares to a target level. You state that the breeding stock has been acquired progressively each year so they are not all of the same age or at the same stage of their productive lives. On occasions you have entered into partnerships for some mares, with a business partner, so as to acquire higher quality broodmares that will help increase future profitability. You are targeting the quality end of the yearling market. You have returned losses since the commencement of the business. You have provided testimony as to a basic lead time of this industry is three years and a commercially viable period of eight. Your income for non-commercial loss purposes is in excess of $250,000. You expect to make a tax profit from the activity in the 2013-14 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(c) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision: Summary: For the 2009-10 and later financial years, Division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless: o you satisfy the income requirement and you pass one of the four tests o the exceptions apply o the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and you do not satisfy the income requirement. Therefore your losses are subject to the deferral rule, unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year in question where: · it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests · there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. Taxation Ruling TR 2007/6 discusses non commercial losses and the application of paragraph 35-55(1)(b) . Paragraph 84 of the Ruling states: The Commissioner needs to be satisfied that there is an objective expectation that the business activity will satisfy a test or produce a tax profit in some future income year falling within a period that is commercially viable for the industry concerned. If the business activity is not expected to satisfy a test or produce a tax profit within this period then the discretion will not be exercised. Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied. As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542 ( Scott's Case ) , the court upheld the Commissioner's decision in not applying the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years. The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis. In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the court expressed the following view: It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities. In your case, you purchased an established farming operation. You purchased some broodmares from the previous owners and over the years gradually increased the number of broodmares. In addition you spent time and resources on improving the assets and practices of the business. You have provided independent evidence which attests to a lead time for the industry of two and a half to three years. You have also submitted testimony that the commercially viable period is closer to eight years due to the need to prove the quality of the mare. Where an ongoing business activity is purchased by a new owner, the 'period that is commercially viable for the industry concerned' is taken from the commencement of the activity, not from when the business was purchased by the new owner. The continuity of activity (especially in relation to the purchase of the broodmares from the previous owner ensures that there in no new business activity commenced when the property was purchased by you. Therefore, even if we accept that the commercially viable period for your industry is a number of years less than period the activity has been carried on, the commercially viable period has expired for the purpose of this private ruling. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997. Please also note that even if the commercially viable period had not expired, taking into consideration all the information you have provided, the Commissioner is not satisfied that your activities will produce a tax profit by the 2013-14 financial year. This conclusion is based on the following analysis: · Your expenditure figures do not increase in line with the increased number of yearlings expected. · Future income projections do not take into account any part ownership of mares. · You have stated that you send broodmares to stallions to be covered for which you pay a service fee. However your income projections do not take into account a rise in service fees for the substantially increased number of yearlings you plan to produce. · You have not taken into account the possibility of any horses being passed in. · Your income and expense projections do not appear realistic. In conclusion, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2010-11 to 2012-13 financial years as the commercially viable period for your industry has passed. Furthermore the Commissioner is not convinced that you will make a tax profit in the 2013-14 financial year taking into account all information submitted.

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.