Private ruling: Non-commercial losses - Commissioner's discretion
Published: August 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2011

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 2011-12 to 2015-16 financial years? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | 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 - Paragraph 35-55(1)(b).

Reasons for decision: Summary: You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for lead time. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's 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 non-commercial loss 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 or produce assessable income for an income year greater than the deductions attributable to it for that year. Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. 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 one of the tests. 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. You must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. As stated above, paragraph 35-55(1)(b) of the ITAA 1997 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. Your actual figures for the 2011-12 financial year show that your activity has produced assessable income and is expected to continue producing assessable income each year in the future. You have provided some independent evidence, in the form of an industry article which states that commercial bearing will take at least four to five years, with maximum production generally achieved by years seven or eight. You now project that your activities will not pass a test or produce a profit until the 2016-17 financial year, or 13 years after you commenced. The Commissioner is not satisfied that the commercially viable period for the industry is 13 years. Therefore, the Commissioner will not 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 2011-12 to 2015-16 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. | Relevant facts: You commenced your primary production business activities in the 2003-04 financial year, under a partnership structure with three other family members. | After initial preparations, the crop planting commenced in 2005 and was completed in 2006. | In 2005, you requested the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 in relation to your activities. At that time you projected that the activity would pass a test in the 2008-09 financial year, or four years after you commenced. The Commissioner exercised his discretion. | In 2009, you requested that the Commissioner's discretion period be extended to the 2010-11 financial year. At that time you projected that the activity would pass a test in the 2011-12 financial year. You provided expert advice from an industry source which stated that income in year five following planting is the standard. The Commissioner extended the exercise of his discretion. | Your current projections show that your tree growing activities will not pass a test or produce a profit until the 2016-17 financial year. These figures also show that assessable income was produced from the activity in the 2011-12 financial year and that it is projected to continue producing assessable income each year in the future. | You have provided a copy of an industry article which states that commercial bearing will take at least four to five years, with maximum production generally achieved by years seven or eight. | Your income for non-commercial loss purposes in the 2011-12 to 2015-16 financial years is expected to be more than $40,000 but less than $250,000.