Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 14 February 2017
Published: July 2017
Ruling period: year ending 30 June 2016
Date scheme commenced: 1 July 2015

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 cattle breeding business activity (the activity) in your calculation of taxable income for the 2015-16 financial year? | A1: Yes

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You commenced the activity during the 2015-16 financial year under a partnership arrangement. You currently have approximately 200 head of cattle, which you will increase over the next five years. The property is located in a drought declared area. To mitigate the effects of the drought and associated land degradation, you have invested in water storage and fencing on the property. These once-off expenses, and the fact that the activity was only carried on for part of the year, has caused your business to make a loss for the 2015-16 financial year. You have provided projected financial statements showing that the activity will be profitable from the 2016-17 financial year.

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), and | Income Tax Assessment Act 1997 Paragraph 35-55(1)(c).

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 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. 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. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise his discretion in the 2015-16 financial year.