Private ruling: Non-commercial losses Commissioners discretion lead time
Date of advice: 26 February 2016
Published: May 2016
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

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 business activity in your calculation of taxable income for the 2014-15 to 2018-19 income years? | A1: Yes.

Relevant facts and circumstances: You purchased an orchard from a bank under foreclosure. Prior to purchase, the property had been unattended for some months and had some neglected trees. You now operate a primary production business activity on the property, under a partnership structure. Your business activity started in 20XX. In the 20XX-YY financial year you decided not to plant any trees in order to see which established trees were able to produce fruit and so that you could remove unwanted stock from the property and prepare the ground for planting in time for the next optimal planting season. For the 20XX-YY financial year, very few trees on the property bore fruit, however this was minimal. You have provided independent evidence which indicates that the lead time for your business activity to reach maximum harvest is six to eight years. You planted trees for your business activity early in the 20XX-YY financial year. You intend to plant more trees in later years. You expect to make a tax profit and/or pass a test in the 20XX-YY financial year. Your income for non-commercial loss purposes in the 20XX-YY financial year was more than $40,000 but less than $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 – section 35-10 | Income Tax Assessment Act 1997 – section 35-30 | Income Tax Assessment Act 1997 – section 35-35 | Income Tax Assessment Act 1997 – section 35-40 | Income Tax Assessment Act 1997 – section 35-45 | Income Tax Assessment Act 1997 – section 35-55

Reasons for decision: Summary: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: ● the exception in subsection 35-10(4) of the ITAA 1997 applies; or ● you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or ● if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your assessable income from sources not related to this activity was more than $40,000 in the 2014-15 financial year. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply. Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2014-15 financial year. | Detailed Reasoning - The Commissioner's discretion - lead time: You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioners discretion can be exercised where: ● the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and ● there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year. TR 2007/6 sets out the Commissioners interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(b) of the ITAA 1997. The following has been extracted from paragraphs 70 to 104 of this Ruling. The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying tests one to four. This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. It is accepted that it is in the nature of your business activity that there will be a lead time before a profit can be expected or, one of the tests passed. For this reason, your business activity has not satisfied one of the tests in the relevant financial year. The information you have provided demonstrates that there is an objective expectation that your business activity will pass one of the tests (the assessable income test) in the 20YY-XX financial year after commencing your activities. It is further accepted that this will be within a commercially viable period for your industry. Therefore, the Commissioner will exercise the discretion available in accordance with paragraph 35-55(1)(b) of the ITAA 1997 in relation to your primary production business activity for the relevant financial years.