Private ruling: Non-commercial business losses and the Commissioner's discretion
Published: November 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: On or after 1 July 2013

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 2013-14 to 2016-17 financial years? | A1: Yes.

Relevant facts and circumstances: You and your spouse acquired a farm (the business) in 20XX. The farm consisted of a number of trees that range of a variety of age. The farm was previously operated by the previous owners however it was in a run-down state when you acquired it. Due to the neglected state of the trees, many required hard pruning and some required replacement. With just the original trees on the farm in their current state, you would not be able to satisfy the $20,000 assessable income test. The produce is sold to a local company for distribution to markets. You have provided evidence in relation to the yields produced from trees from the Department of Agriculture, Fisheries and Forestry's (State Government) website. The website provides the following: • although trees may start to bear fruit in the X year, commercial quantities are generally not harvested until the X year. Yields are extremely variable across farms and districts, and will depend on variety, season and level of management • X trees will reach full production after X years for a new orchard under good management (based on a spacing of 8 m by 4 m or 312 trees/ha). You satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You will plant additional trees on the farm, which will be staggered as the nursery can only supply you with X plants per year. Your projected income and expenditure shows that you expect the business to produce assessable income of more than $20,000 by the 20XX-XX financial year and to produce a tax profit by the 20XX-XX 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) | 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 20XX-XX to 20XX-XX financial years so that you are not required to defer any losses from the 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 any losses in the years in question will be the result of the nature of the business activity. It is also accepted that you will 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 20XX-XX to 20XX-XX financial years.