Private ruling: The Commissioner's discretion and non-commercial business losses
Date of advice: 7 July 2015
Published: July 2015
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20XX

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 primary production farming business (the activity) in the calculation of your taxable income for the 20XX-YY and 20YY-ZZ financial year? | A1: No.

Relevant facts and circumstances: You purchased a property in 20XX for the purpose of carrying on the activity. You live in a different state to the property. At the time of purchase, the property had no major improvements done other than some reasonably new boundary fences. There were no stock handling facilities such as yards and loading ramps, or storage sheds on the farm. Due to the distance from your home to the property, opportunities to visit and conduct improvement work on the property have been limited. However since purchasing the property you were able to periodically travel to the property to undertake major improvements. The property is currently capable of running large stock but not small. Exclusion fencing will be undertaken to allow property to run a small stock breeding/finishing enterprise within the next two years. The property now has excellent water storage capacity but consists of predominantly light to heavily timbered areas. A large area of the property is considered unimproved pasture consisting of principally native grasses. Short term stock carrying capacity is limited until additional clearing of lightly timbered areas and pasture renovation in cleared areas can be undertaken. It is your intention to eventually relocate to the property. However you are unable to in the short-term due to work commitments in your state over the next 12-18 months. It is your intention to visit the property on a more regular basis during 20YY-ZZ and 20ZZ-AA financial years to complete the improvements. Whilst you are able to run large stock units now that you have secure boundary fences, you have not stocked your property for the following reasons: • they are currently overpriced • likely profit margins would be low if you were to purchase now • you do not have handling facilities on the property • you do not yet live on the property to monitor stock health, which is required on a day to day basis. Once you have relocated and erected exclusion fencing and handling facilities on the property you intend to run a commercial breeding/finishing operation. You expect to have gross sales from the activity of more than $20,000 in the 20ZZ-AA financial year. Your other income for non-commercial loss purposes was more than $40,000 but less than $250,000 for the 20XX-YY and 20YY-ZZ financial years.

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

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 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. 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. The note to section 35-55 of the ITAA 1997 which contains the discretion states this discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. It does not support any view that the discretion should available where the failure to make a profit is for reasons other than the nature of the business, such as, business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned, such as the hours of operation, location, climate or soil conditions, or condition of the property purchased. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a tax profit or from passing one of the four tests. It appears that a significant contributor to the losses of the business activity is the significant expenditure you made to develop the property, which was required due to the fact that you purchased the property in a rundown state. This, as well as your decision not to stock the property due to being unable to monitor stock from your home town, has impacted on the ability of the business activity to generate income, and its ability to make a tax profit or pass one of the four tests. The substantial distance you live from the property has also meant that improving the property to the point where you can stock it has taken longer than otherwise would have been the case. The above facts are individual circumstance affecting your particular business activity, rather than an inherent characteristic that affects all businesses in the industry. Therefore the Commissioner will not exercise the discretion to allow you to include any losses from your business in your calculation of taxable income for the 20XX-YY and 20YY-ZZ financial years.