Private ruling: Commissioner's discretion
Published: February 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2009

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 prioduction business activity in your calculation of taxable income for the 2010-11 financial year? | A1: 


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. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 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 was above $250,000 in the 2010-11 financial year. In order to exercise the discretion, the Commissioner must be 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 (paragraph 35-55(1)(c) of the ITAA 1997). 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 or a high level of debt funding. In your case, you commenced your primary production activities in 2009 and your projected livestock figures show you will reach maximum production in the 2013-14 or 2014-15 financial years. However, your projected income and expenditure figures show that your activities are not expected to make a tax profit until the 2017-18 financial year, or when your debt levels are reduced. This will be ten years after you commenced. You have provide independent evidence which suggests the lead time for this industry could be a decade, more or less, depending on seasonal conditions, disease, conception rates and market demands. These types of variables would not be considered to be inherent to the nature of the business activity but peculiar to the individual involved. Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is ten years. The reason your activities made a loss is due to the small scale of your operations and your high level of debt funding. This is peculiar to your situation and is not inherent to the nature of the business. 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 for the 2010-11 financial year.

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. | Relevant facts: You commenced your business activity in 2009. | Your plan is to develop a pure bred livestock herd using the latest scientific technology and management. You also run a commercial herd. | Your actual and projected livestock numbers show you expect to reach maximum production in the 2013-14 or 2014-15 financial years, with maximum sales of 20 head per annum. | Your actual and projected income and expenditure figures show your activities are expected to produce a tax profit in the 2017-18 financial year, once your debt levels are reduced. | You have provided independent evidence of the commercially viable period for this type of industry from different sources: | · one which states that lead times could be a decade, more or less, depending on seasonal conditions, disease, conception rates and market demands, and | · one which states that rural breeding enterprises, such as yours, can take up to five years or more to show a profit. | Your income for non-commercial loss purposes in the 2010-11 financial year was above $250,000.