Private ruling: Non-commercial losses - Commissioner's discretion

Ruling: Q1: Will the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activity in the calculation of your taxable income for the 20XX-XXand 2008-09 income years? | A1: No. As the real property test is available to you for the 20XX-XXand 2008-09 income years and you have advised that you met this test, the discretion is not required for these income years. | Q2: Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production activity in the calculation of your taxable income for the 2009-10 to 2017-18 income years? | A2: No.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · Your private ruling application · Documents you supplied with your application including your farm business plan, a Memorandum of Understanding with a farm management entity, work reports from the farm management entity, a tree survey and an article from the relevant State government agricultural department on the relevant industry. You purchased a property in the 20XX-XXincome year. Your property was assessed in 20XXby a research scientist who concluded that it would be possible to establish a certain primary production harvesting activity on the site. You took approximately one year to prepare the property to make it suitable for planting the trees. You began planting the trees early in the 2009-10 income year. You have adopted a staggered approach to planting the trees to manage the business risk. Of the total area to be planted, you are planting 20% each year. In the industry concerned, harvesting commences about five years after the trees are planted. When in full production, you expect the net profit to be at least $100,000 per annum. You expect your business to first make a tax profit in the 2018 income year. You have engaged an entity to provide farm management services. You are also actively involved in the farm's management. You indicated in your private ruling application that in your industry, the accepted period before an activity becomes commercially viable is five years. You do not meet the <$250,000 income requirement set out in paragraph 35-10(2E) of the ITAA 1997.

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 Section 35-55 | Income Tax Assessment Act 1997 Paragraph 35-55(1)(b) | Income Tax Assessment Act 1997 Paragraph 35-55(1)(c)

Reasons for decision: Detailed Reasoning - 20XX-XXand 2008-09 income years: For the years prior to the 2009-10 income year, all taxpayers have access to the four non-commercial loss (NCL) tests (the assessable income test, the profits test, the real property test, and the other assets test) in determining whether they are required to defer their business losses under the NCL provisions. You have advised that you meet the real property test. Therefore, the NCL provisions do not apply to require you to defer your business losses for the 20XX-XXand 2008-09 income years. Consequently, the Commissioner's discretion is not required and will not be exercised for those income years. | Detailed Reasoning - 2009-10 to 2017-2018 income years: From the 2009-10 income year, the NCL legislation has been amended to include an income requirement. The four NCL tests are only available to taxpayers who meet the income requirement. Consequently, if the income requirement is not met, the taxpayer must defer their business loss unless the Commissioner exercises a discretion. A discretion is only available in certain circumstances. The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not meet the income requirement. Therefore, your losses from your harvesting activity for the 2009-10 and later income years must be deferred unless a discretion is exercised. The discretion that is relevant in your circumstances is provided by paragraph 35-55(1)(c) of the ITAA 1997. In order to exercise this discretion, the Commissioner must be satisfied that there is an objective expectation, based on evidence from independent sources, that your business activity will produce a tax profit within a commercially viable period for the industry concerned. For the Commissioner to exercise the discretion, you must also 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. That is, the reason why the business is making a loss must be due to the inherent features of the industry rather than the way the business is carried on. 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 Administrative Appeals Tribunal (AAT) 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 AAT member 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. | Detailed Reasoning - Your harvesting activity: Early in the 2009-10 income year you planted 20% of the total area that you intend to use for your harvesting activity. You intend to plant an additional 20% per year. You expect the first harvest to occur after five years and full yields after ten years. You have indicated that your harvesting activity will produce a tax profit in the 2017-18 income year. From the information you have provided, it appears that your activity could make a tax profit several years before this if you chose to plant all your trees at the start rather than adopt a staggered planting approach. This conclusion is in line with your statement that the commercially viable period for your industry is five years. It is acknowledged that you had your reasons for taking a staggered planting approach, that being to manage the business risk. However, the reason that your business activity will not make a profit until 2017-18 is due to a decision you have made with regards to how you run your business rather than due to any inherent features of the industry. That is, another business in the same industry could make a tax profit in a substantially shorter time frame if it did not adopt a staggered planting approach. You have not shown that your business will produce a tax profit within the commercially viable period for the industry concerned. Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in relation to your harvesting activity for the 2008-09 to 2017-18 income years. Consequently, any losses from your activity in these income years are required to be deferred.

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