Private ruling: non-commercial losses - Commissioner's discretion
Published: May 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: A1: No.

Relevant facts and circumstances: You commenced your plantation activities in 1993. The timber trees were planted between 1993 and 2007. The price for timber has dropped significantly and there is no guarantee that it is possible to sell the timber in the present market. Because of the low prices you have decided to defer the harvesting and selling of the plantation timber. The independent evidence you provided indicates that the trees were expected to be harvested within 20 years of planting. Your adjusted taxable income for non commercial loss purposes in the 2011-12 financial year was more than $250,000 and you also expect your income to be more than $250,000 in the 2012-13 financial year.

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 his 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 is above $250,000 in the 2011-12 financial year and you also expect this will be the case in the 2012-13 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. 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. You planted trees between 1993 and 2007 and harvesting of part of the plantation was expected to commence in the 2011-12 financial year. You anticipated that the harvest would produce income greater than deductions attributable to it in the 2011-12 financial year which is approximately 19 years after planting. You have provided evidence from an independent source that indicate that the commercially viable period for this plantation is 20 years. Due to the low prices currently expected there is now no guarantee that it is possible to sell the timber in the present market. Therefore on commercial grounds you have decided to defer the harvesting and selling of the plantation timber. You have made a commercial decision not to proceed with the harvest of the timber in the 2011-12 or the 2012-13 financial years and in so doing have exceeded the commercially viable period for your activity. 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 in relation to your timber plantation for the 2011-12 and 2012-13 financial years.

Subject: non-commercial losses - Commissioner's discretion: 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 timber plantation enterprise in the calculation of your taxable income for the 2011-12 and 2012-13 financial years?