Private ruling: non-commercial losses
Published: January 2012
Ruling period: Year ending 30 June 2011
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 activity in your calculation of taxable income for the 2010-11 financial year? | A1: 

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 primary production business. For a number of years you leased a portion of the land out. You run sheep on the remaining portion of the land. In the 2010-11 financial year you decided to crop farm the land you were previously leasing and spent money on seed, fertiliser and crop spraying. As a result of these expenses your primary production business made a loss in the 2010-11 financial year. The business has been operating for over 20 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(c) | Income Tax Assessment Act 1997 subsection 35-10(2) | 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 satisfy 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 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 income 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. It should be noted that the periods discussed above are measured from the commencement of the activity itself: Applicant 1761 of 2011 v. Commissioner of Taxation [2011] AATA 779 at 27. Where there are more than one business activities, Division 35 needs to be applied to each business activity separately. The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or separate/multiple business activities. These include the location of each of activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities. In your case, your property was used for sheep and wool production, prior to and post the 20XX-20XX financial year. After you discontinued the lease, you began cropping this portion of the property (25% of the property area) as you stated that sheep and wool were down considerably. The overall impression gained is that you have simply re-amalgamated the previously leased portion of the land into the entire property operations, the activities are carried on at the same locations, using the same assets by the same business entity and undertaken to diversify your existing primary production activity in order to supplement the lower performing existing sheep and wool production being operated on the remainder of the property. It is considered the sheep, wool and cropping constitutes a single business activity. You have not provided any information regarding what is the commercially viable period for your industry. However, as your business activity has been operating for approximately 25 years, it is considered the commercially viable period has passed. The Commissioner cannot exercise his discretion in your case because the objective commercially viable period has expired. Your inability to make a tax profit is not due to the nature of the business but to business decisions unique to your operation.

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