Private ruling: non-commercial business losses
Published: March 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

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 fruit growing business activity in the calculation of your taxable income for the 2010-11 and 2011-12 financial years? | A1: 

Relevant facts and circumstances: You commenced a primary production business activity, under a partnership structure, during the 2009-10 financial year. You first planted on the property late in the 2009-10 financial year. You planted again early in the 2010-11 financial year. You state that it normally takes 2 to 3 years for the plants to begin producing, based on consistent irrigation, fertilization and the average climate in your region. You have provided financial projections for the business activity for the 2010-11, 2011-12 and 2012-13 financial years. You expect to be at full production and, make a tax profit from the activity in the 2012-13 financial year. You do not meet any of the four tests for non-commercial losses for the 2010-11 financial year, however, your financial projections show that you expect to pass the assessable income test in the 2011-12 financial year. Your income from other sources not related to this activity is over $40,000 Your income for non-commercial loss purposes in less than $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Paragraph 35-55(1)(b)

Reasons for decision: Detailed Reasoning - Non-commercial losses: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. | Detailed Reasoning - Commissioner's 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 a 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 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 first planted in the 2009-10 financial year, and again in the 2010-11 financial year, and as it takes approximately 2 to 3 years for these plants to begin producing, you do not expect to make a tax profit from the activity until at least the 2012-13 financial year. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that you will pass one of the four tests or make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise his discretion, under paragraph 35-55(1)(b) of the ITAA 1997, to allow you to deduct the loss for your stone fruit growing business activity in the 2010-11 and 2011-12 financial years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.