Private ruling: Non-commercial losses
Published: June 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2012

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 activity in the calculation of your taxable income for the 2012-13 to the 2014-15 financial years? | A1: Yes.

Relevant facts and circumstances: You satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. Your business is a primary production activity and your financial projections provided with this private ruling application show you will pass the assessable income test in the 2015-16 financial year and make a profit in the 2016-17 financial year. Evidence you provided in a previous private ruling application suggests that the maximum production is generally achieved by years 7 to 8 years after planting.

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) Reason for decision | For the 2009-10 and later income 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 | • the Commissioner exercises his discretion. | The relevant discretion may be exercised for the income year in question where: | • it is in the nature of the business activity that there will be an initial period of time before it can be expected to pass one of the four tests | • there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. | You commenced your business in the 2007-08 financial year and you predicted you would pass the assessable income test in the 2012-13 financial year. In the 2014 application you do not expect to pass the assessable income test until the 2015-16 financial year due to over-optimistic projections in the original plan. This is nine years after you commenced and one year outside the period in which the independent evidence expected you to meet the maximum production period. | Paragraphs 97 and 98 of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion allow for the period supplied by an independent source to be extended by a year to account for that source only projecting a commercially viable period for a range of years. | Notwithstanding that you predict that you will not pass the assessable income test until one year past the period that the independent evidence expected, it is considered reasonable, within the guidelines of TR 2006/7, that the discretion be exercised. | Consequently the Commissioner will exercise the discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the 2012-13 to the 2014-15 financial years. | The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

Reasons for decision: Summary: For the 2009-10 and later income 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 • the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year in question where: • it is in the nature of the business activity that there will be an initial period of time before it can be expected to pass one of the four tests • there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. You commenced your business in the 2007-08 financial year and you predicted you would pass the assessable income test in the 2012-13 financial year. In the 2014 application you do not expect to pass the assessable income test until the 2015-16 financial year due to over-optimistic projections in the original plan. This is nine years after you commenced and one year outside the period in which the independent evidence expected you to meet the maximum production period. Paragraphs 97 and 98 of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion allow for the period supplied by an independent source to be extended by a year to account for that source only projecting a commercially viable period for a range of years. Notwithstanding that you predict that you will not pass the assessable income test until one year past the period that the independent evidence expected, it is considered reasonable, within the guidelines of TR 2006/7, that the discretion be exercised. Consequently the Commissioner will exercise the discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the 2012-13 to the 2014-15 financial years. The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.