Private ruling: Non-commercial losses - lead time - income requirement not met
Date of advice: 26 August 2022
Published: November 2022
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will the Commissioner exercise the discretion to allow you to include any losses from your primary production business in the calculation of your taxable income for the 20YY-YY financial year? | A1: Yes Having considered your circumstances and the relevant factors the Commissioner has granted his discretion. It is accepted there is a 'lead time' in the nature of your business. Further information on non-commercial losses can be found by searching 'QC 33774' on ato.gov.au

Relevant facts and circumstances: This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. • To satisfy the non-commercial loss law, one of the criteria requires your assessable income from other sources that do not relate to the XXXX primary production farming business activity is less than $40,000. In your case, in the 20YY-YY income tax year your assessable income from other sources that do not relate to the XXXX primary production farming is greater than $40,000. You derived this income from a foreign source. • To satisfy the non-commercial loss law, another criteria requires you to meet the income requirement, where the sum of four elements for calculating income is less than $250,000. In your case, in the 20YY-YY income tax year your taxable income was $XXX, reportable fringe benefits was $X, reportable super contributions was $X and your total net investment losses was $X. Therefore, the sum of these four elements total $XXX. You do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 20YY-YY financial year. • You and your XXXX acquired a XX hectares (XX acres) XXXX farm at XXX, located in XXX region of XXX, in the 20YY-YY financial year. • Your XXXX commenced carrying on the XXXX primary production business as a sole trader in 20YY-YY financial year. • Your XXXX operated the XXXX growing farm as a sole trader from 20YY until the end of the 20YY income tax year. • You and your XXXX commenced to carry on the XXXX primary production business as a partnership from the 20YY-YY financial year. The partnership employed one casual worker. • The climate in the XXX region of XXX is more temperate, resulting in trees growing slower than in the XXX region of XXX, with trees reaching full size in approximately X years. XXXX trees reach full size if grown in the XXX region in approximately X years. • You provided details about your orchard layout design. • Tree planting on the XXX XXX property commenced in DD MM YYYY with XX trees, followed by a further XX trees in DD MM YYYY, reaching an initial planting of XX trees or XX% of the orchard capacity • Due to flood events in 20YY and 20YY it resulted in a loss of XX trees and continued saturation of soil until 20YY. • You purchased and re-planted a total of XX trees in DD MM YYYY, DD MM YYYY, DD MM YYYY, and DD MM YYYY. • Other than the tree planting that occurred in the initial years and the replanting, you carried out further tree plantings in DD MM YYYY, DD MM YYYY and DD MM YYYY. You estimated that in the 20YY season your XXXX growing farm had planted about XX bearing trees and about XX non-bearing young trees (a total of XX XXXX trees). • As of DD MM YYYY, you estimated you had about XX trees remaining to plant to reach full orchard design. • As of DD MM YYYY, there are approximately XX trees yet to be planted before the orchard is at full capacity of XX trees in XX hectares within current orchard boundaries. • As a sole trader, your XXXX XXX had harvested XX and XX tonnes of XXXX XXXX in 20YY and 20YY seasons respectively. • As a partnership business you and your XXXX had harvested XX tonne, XX tonne, XX tonne, XX tonne and XX tonne of XXXX XXXX in the 20YY, 20YY, 20YY, 20YY and 20YY seasons respectively. • For tax reporting purposes the XXXX XXX sales are reported on a cash basis. • The per kilogram XXX sale price has ranged from $X to $X in 20YY and $X for 20YY. • You have submitted 20YY report XXXX culture in XXX by Department of Primary Industries XXX.

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)(c)

Reasons for decision: Summary: For the 20YY-YY financial year, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you satisfy the income requirement, and you pass one of the four tests • the exceptions apply, or • the Commissioner exercises discretion In your circumstances, your assessable income from other sources that do not relate to the XXXX primary production farming business activity is not less than $40,000 and you also do not satisfy the income requirement. So, your business losses are therefore subject to the deferral rule unless the Commissioner exercises discretion. In relation to lead time, as outlined in paragraph 16B of Taxation Ruling 2007/6 Income tax: non-commercial losses: Commissioner's discretion (TR 2007/6): The Commissioner may on application, for an individual who does not satisfy subsection 35-10(2E) exercise the discretion in paragraph 35-55(1)(c) for a business activity that has started to be carried on, where, for the income year(s) in question: • 'because of its nature' it has not, or will nor produce a tax profit; and, • there is an objective expectation, based on evidence from independent sources (if available) that within a period that is commercially viable for the industry concerned, the activity will produce a tax profit. | Detailed Reasoning - Lead time: The lead time discretion 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. For example, as outlined in para 29 of PSLA 2007/6 an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce any income. For a taxpayer who does not satisfy the income requirement the lead time discretion may be exercised where there is an objective expectation, based on evidence from independent sources that, within a period that is commercially viable for the industry concerned, the activity will produce a tax profit. You have provided an informational timeline to attest that your business activity commenced in the relevant year. The information provided indicates that you commenced at a significant size and scale. As per TR 2007/6, to be able to establish the failure to produce a tax profit was 'because of its nature' the failure must be an inherent characteristic of the business activity which is common to other businesses in the industry. Due to the nature of your business activity, the final product is not available for sale for several years. Given the location of the XXXX growing farm and the prevailing climatic and weather conditions are temperate, we have accepted your contentions that the XXXX trees grow slower compared to XXXX trees that are grown in the XXX region. Therefore, we have allowed for a lead time of X years in your case. It is therefore reasonable for the Commissioner to exercise lead time discretion. 20YY-YY income tax year is within the time period allowed for lead time of your XXXX farm. Therefore, special circumstances have not been considered to exercise the Commissioner's Discretion.