Private ruling: Commissioner's discretion
Published: May 2014
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

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 winery enterprise in the calculation of your taxable income for the 2009-10 financial year? | A1: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c). | Income Tax Assessment Act 1997 - Subsection 35-10(2E).

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 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 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 (paragraph 35-55(1)(c) of the ITAA 1997). 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. In your case, you commenced planting grape vines in the relevant year and produced your first wine in 200X. You have stated that you anticipate that your activities will produce a profit in two to three years time or the 2011-12 or 2012-13 financial years. This is B years after you commenced your vineyard activities and C years after you began producing your own wines. You have not provided any independent evidence of the commercially viable period for this business/industry, however, taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business activity is B years (or even C years for wine production). The reason your business activity is producing a loss is the costs incurred in producing your product far out weigh the income the product it is capable of producing and this is peculiar to your situation and is not inherent to the nature of the business. Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. 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 for the 2009-10 financial year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You planted your first grape vines in the relevant years and continued planting over the next few years. | Initially, the market for wine grapes was good but, when the market began to drop, you decided to crush your own grapes and produce your own wines. | You have been producing your own wine since 200X under your own labels. | You have produced between X and Y cases of wine each year since 200X. | You have wine in storage and you currently have some wine in production. | Due to the current oversupply of wine, you intend to retain your wine until such time as there is a turn around, which industry experts anticipate will be in about two or three years time. | You believe your activities will produce a tax profit in two to three years time. | Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000.