Private ruling: Non-Commercial Losses Lead Time
Published: October 2011
Ruling period: Year ended 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your mixed primary production business in your calculation of taxable income for the 2010-11 to 2014-15 financial years? | A1: No

Relevant facts and circumstances: You purchased a farm which was rundown. You moved onto the property and commenced your primary production business. You manage and operate the farm with the assistance of family and casual contractors. The property was purchased without any farm plant or machinery. You have undertaken stock water improvements, repaired or replaced existing fences, replaced derelict stock yards and constructed a new farm machinery shed and hay shed. You are currently undertaking weed eradication and pasture improvement. Of the total farm area, a vast majority is arable. You purchased sheep in the 2010-11 financial year. You made pasture hay sales in the 2008-09 financial year. You have provided a report from an industry advisor. You did not satisfy the income requirement in the 2009-10 financial year and do not expect to satisfy it in the 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 financial years under subsection 35-10(2E) of the ITAA 1997.

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

Reasons for decision: Summary: Commercially viable period 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. The relevant discretion may be exercised for the income year in question where: · it is in the nature of your business activity that there will be a period before a tax profit can be produced · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. You engaged a firm of agricultural advisers to provide comment on the commercially viable period for businesses in your industry to make a profit. They stated what they thought was the commercially viable period for mixed farming enterprises similar to yours. We do not find this statement to be compelling evidence of the commercially viable period. This is because the range they have provided is so broad. A further concern about the evidence provided is that the letter supplied does not disclose the methodology used to arrive at the conclusion. In many cases a practical indicator for the commercially viable period is the length of time it would inherently take a particular activity to achieve a commercial rate of income production, for example, the length of time it would take a tree to mature to a point it would bear a commercial crop. In the case of breeding cattle for veal production, this period would be two or three years. After this point it arguably would not be the nature of the cattle breeding activity that prevents a profit being made but the circumstances of the particular activity. In relation to this point, in the previous private ruling that issued to you on this matter, it was noted that the length of time needed for you to make a profit from your activity was not simply a result of the nature of the activity. Rather it was your individual circumstances and not something that was inherent in the industry which increased the time it would take to make a taxable profit. This conclusion is one we would again make. Even if it was accepted that the commercially viable period for your industry was the time suggested in your report, we have concerns as to whether your enterprise would actually achieve a profit within that timeframe. Given the above, the Commissioner is not satisfied that you would indeed make a profit within the given commercially viable period. In conclusion, we are unable to accept the proposition that the commercially viable period for your industry is what was stated in the report and remain unconvinced that a profit would even be made within such a timeframe. Furthermore, it is considered that the length of time it will take for you to achieve profitability is not due to the inherent nature of the activity but because of circumstances associated with your particular activity. Therefore, we will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 in the 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 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.