Private ruling: Non-commercial losses
Published: June 2012
Ruling period: Year ended 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) 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 2010-11 to 2012-13 financial years? | A1: No.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a mixed farming business including the production of hay, horse activities and the breeding of livestock. You purchased a new property. Prior to purchase, the property had been used for breeding livestock and was in a run down state due to the lack of rain and overgrazing of livestock. As well as breeding livestock, the previous owners cut Lucerne. They also grew oats from time to time. They also cut meadow hay in round bales which they used for feed for the livestock in winter. The current objective of your business plan is to set out a method by which the business would produce a profit by migrating from production to the breeding and sale of horses and production of high quality organic hay. You submit that organic certification can take up to seven years. You are working on a process to improve paddocks. As part of your business you keep horses for breeding and sale. You have a history of breeding, have been breeding for the past five years and have purchased horses over the last seven. Prior to this, you worked with horse breeders and trainers to establish a network of experts to assist you with your breeding efforts. Along with the horse breeding program you propose to begin a rescue operation. You also earn income through agistment. The business has yet to make a profit.

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

Reasons for decision: Summary: For the 2009-10 and later financial years, Division 35 of the ITAA 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 you 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 financial 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. Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied. Taxation Ruling TR 2007/6 states that the 'lead time' discretion provided for by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made. TR 2007/6 does not support any view that the discretion should be available where the failure to make a profit is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or 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 the level of debt funding. In your case, you wish for the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997. You carry on a primary production business of mixed farming. You purchased a new property in a run down state and are currently migrating from livestock farming to predominantly focusing on horses and organic hay. You expect to make a profit in the 2013-14 financial year. The business is currently running at a loss. Based on the figures you have supplied, it can be seen that the major contributor to this loss is not the nature of the business but the extremely high level of debt funding in relation to income. Contributing to the current losses is your decision to purchase a property in a run down state and your decision to gradually migrate from livestock to predominantly hay and cattle. This additional expenditure is an individual circumstance affecting your particular business activity rather than an inherent characteristic that affects all businesses in the industry. Your decision to purchase a new property does not alter the requirement that a commercially viable period commences at the start of the business activity and does not reset simply because you change locations. We consider the years you estimate it will take you to return a profit to be outside the commercially viable period for your industry. Furthermore, your decision to transition to organic hay does not extend your lead time, as although, you are able to sell hay at a higher cost once certification is achieved, you are nevertheless able to operate commercially during the transition period as hay is an annual crop. In summary, your level of debt funding, your decision to purchase a new property in a run down state and the gradual transition to different forms of mixed farming cannot be used as determinative factors in this private ruling and does not extend the commercially viable period. It follows the Commissioner cannot exercise his discretion in your case because the objective commercially viable period has expired.

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.