Private ruling: Non-commercial losses - lead time
Date of advice: 6 March 2024
Published: 22 April 2024
Ruling period: Year ended 30 June 2023 | Year ending 30 June 2024 | Year ending 30 June 2025 | Year ending 30 June 2026
Date scheme commenced: 1 July 2019

Ruling: Q1: Will the Commissioner exercise his discretion to allow you to include any non-commercial losses from your primary production activity in the calculation of your taxable income for the 2023-24 to 205-26 financial years? | A1: Yes. Having considered your circumstances and the relevant factors the Commissioner will exercise his discretion. It is accepted that there is a 'lead time' in the nature of your activity and it will make a tax profit within the commercially viable period for the industry concerned. Further information on non-commercial losses can be found by searching 'QC 33774' on ato.gov.au

Relevant facts and circumstances: You will not satisfy the under $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the 2023-24 to 2025-26 financial years. During the 2019-20 financial year you and your spouse formed a partnership and intended to commence your primary production business activity. You relied on the expertise of an industry professional when planning your business, who indicated that there were no material concerns as to the viability of the activity going forward, if it is operated in a manner based on standard industry practice. Over a nine-month period in the 2019-20 financial year you purchased equipment and commenced preparing the land for the activity. You spent a further three-month period in the 2020-2021 financial year purchasing and installing more equipment. You ordered and paid a deposit for a commercial number of trees, but due to a shortage, they did not arrive and you could not commence planting until September 2020. You provided independent evidence in relation to the yields produced from new trees from a state government website to support your application. The website provided the following: • although trees may start to bear product in the second year, commercial quantities are generally not harvested until the third year. • Yields are extremely variable across farms and districts, and will depend on variety, season and level of management, and ¢trees will reach full production after seven years for a new orchard under good management (based on a spacing of 8m by 4m or 312 trees/hectare). On the 2019-20 financial year, the Commissioner exercised his discretion to allow you to include your non-commercial losses in the calculation of your taxable income for the 2019-20 to 2021-22 financial years. You have since applied for an extension to the original ruling to encompass the 2023-24 to 2025-26 financial years. You employ 1 casual staffer with seasonal workers contracted as needed. Your initial projections stated that the activity would be profitable by the 2022-23 year, but due to poor yields and unfavourable market and economic conditions, your business activity will not make a profit until the 2025-26 financial year to account for when the trees start producing commercially viable quantities of product. You will incur additional operational costs for tree care, labour, and materials. You have revised your profit/loss projections based on these changes. The revised lead time is still within the industry standard period of 7 years. You have not incurred any further significant capital expenditure since the first 3 years of the activity being commenced, nor do you project to incur any further capital investment in the short-medium term future.

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)(b)