Private ruling: Non-commercial losses and Commissioner's discretion in relation to lead time
Date of advice: 28 June 2016
Published: August 2016
Ruling period: Year ending 30 June 20CC | Year ending 30 June 20HH | Year ending 30 June 20DD | Year ending 30 June 20EE
Date scheme commenced: 1 July 20BB

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 tree growing business activity in your calculation of taxable income for the 20BB-CC to 20DD-EE income years? | A1: Yes

Relevant facts and circumstances: You own AAA acres of land. You now operate a primary production activity on the property under as a sole trader. The plants will be grown on FF acres of this property. You will be planting GGG trees. Your business activity started in 20BB. In 20CC you pre-ordered the GGG trees and placed a deposit. Purchase of the trees must be approximately nine to twelve months prior to planting to ensure that they are properly inoculated to ensure growth of the plants. You will be able to plant the trees you have purchased early 20HH. You have provided independent evidence that it takes approximately four to five years for an inoculated tree to begin producing vegetables. You expect to make a tax profit and/or pass a test in the 20DD-EE financial year. Your income for non-commercial loss purposes is projected to be less than $250,000 for the 20BB-CC financial year. You previously operated a building construction business which ended in the 20BB or 20CC calendar year. You keep a small number of livestock on the property, however they are kept separate from the vegetables and you do not currently operate a business that involves those livestock.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - section 35-10 | 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 - section 35-55

Reasons for decision: Summary: The Commissioner is satisfied that the nature of your business is such that there will be a lead time before one of the four tests will be met. Therefore, the Commissioner will exercise the discretion available in relation to your vegetable growing activities for the 20BB-CC to 20DD-EE financial years. | Detailed Reasoning - Detailed reasoning: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: • the exception in subsection 35-10(4) of the ITAA 1997 applies; or • you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or • if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your assessable income from sources not related to this activity was more than $40,000 in the 2014-15 financial year. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply. Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 20AA-BB financial year. | Detailed Reasoning - The Commissioner's discretion - lead time: You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioners 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 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 listed above or produce assessable income for an income year greater than the deductions attributable to it for that year. TR 2007/6 sets out the Commissioners interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(b) of the ITAA 1997. 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 tests one to four. 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. It is accepted that it is in the nature of growing vegetables there will be a lead time before a profit can be expected or, one of the tests passed. For this reason, your business activity has not satisfied one of the tests in the relevant financial year. The information you have provided demonstrates that there is an objective expectation that your business activity will pass one of the tests (the assessable income test) in the 20DD-EE financial year after commencing your activities. It is further accepted that this will be within a commercially viable period for the industry. Therefore, the Commissioner will exercise the discretion available in accordance with paragraph 35-55(1)(b) of the ITAA 1997 in relation to your vegetable growing business activity for the relevant financial years.