Private ruling: non commercial losses
Published: December 2011
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 January 1998

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2009-10 to 2012-14 financial years? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of the private ruling is described below. This description is based on a number of documents you have provided us. These documents form part of and are to be read with this description. You do not satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business in partnership on the land is primarily devoted towards olive farming. You commenced business operations in the 1990's. You planted a mixture of normal and smaller sized trees. You submit that the smaller trees have not yielded as expected and have suffered from diseases. In the 2000's you switched to organic production and constructed a processing facility. You have provided independent evidence that states olive trees can commence production of good commercial crops at 4-5 years, and full commercial production begins at 9-10 years.

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)(c)

Reasons for decision: Summary: 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 meet the income requirement and you pass one of the four tests § the exceptions apply § the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements. for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years: (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C). The note to paragraph 35-55(1)(c) of the ITAA 1997 referred to the paragraph being intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. It provides the example of the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. You have provided independent evidence that states olive trees can commence production of good commercial crops at 4-5 years, and full commercial production begins at 9-10 years. In your projected income and expenditure statement you have submitted that your business activity will not produce income greater than deductions attributable to it until over 15 years since your activity commenced. Your decision to plant a smaller variety tree, your decision to change to organic production and your high depreciation and interest expenses in relation to total expenses are unique to your situation and not inherent to the industry. Where the business does not produce a profit within the commercially viable period and also, where the reason for not making a profit within a commercial viable period is not an inherent factor of the business, the Commissioner is not able to exercise the discretion. In your circumstances the commercially viable period has passed and the circumstances you have submitted are not considered to be inherent factors of the olive growing industry. 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.

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.