Private ruling: Non-commercial losses - Commissioner's discretion
Published: September 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2010

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 in your calculation of taxable income for the 2009-10 to 2013-14 financial years? | A1: No.

Relevant facts and circumstances: Your income for non-commercial loss purposes is greater than $250,000. You commenced your mixed primary production on your property in 20XX. Your business plan is to increase your production in line with the expected market increase. You consider that it takes about three years to have a product ready for sale. You have not provided a period of time from an independent source that is considered to be the commercially viable period for your activity.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 35-1 | Income Tax Assessment Act 1997 subsection 35-55(1) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c) | Income Tax Assessment Act 1997 subsection 35-10(2E).

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 and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule. Under paragraph 35-55(1)(c) of the ITAA 1997 the Commissioner's 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. This note following paragraph 35-55(1)(c) states; Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any 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. We do not consider that there is a lead time between the commencement of activity (one) and the production of any assessable income. Your business was able to generate income in your first financial year of operation. We do consider that there is a lead time between the commencement of activity (two) and the production of any assessable income. Although you have not provided, from an independent source, a period of time within which you could become commercially viable you have stated a three year period would be reasonable. Paragraph 79 of TR 2007/6 states: The inherent characteristics may be present for an initial period from the time the business activity commences. After that initial period has elapsed, which can be several years, the inherent characteristics may cease to be the cause of business activities of the type in question being unable to satisfy any of the statutory tests. Paragraph 35-55(1)(c) of the ITAA 1997 has two criteria that must each be satisfied. The conclusion that the first criterion has not been met, in that the failure to make a tax profit in your primary production activity is not an inherent characteristic of your primary production activity means that it is not necessary to consider whether the second criterion, regarding the commercially viable period, has been met. However the comments of the Tribunal in Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779 paragraph 27 explains how this period is viewed: …whether, as a matter of objective expectation, the Applicant's business activity will produce the excess of assessable income specified. In so doing, we must act on objective evidence where available. On that evidence, six years is a commercially viable period. But that period runs from when the business activity commences… It is considered that 200X financial year is the commencement date of your activity and the commencement date of the lead time. You expect to make a profit in the relevant financial year which is eight years after commencement of your activity and five years past the period that you consider to be the lead time. Therefore although we accept that a lead time exists for activity (two) we consider the lead time has now passed. 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 profit.