Private ruling: Non-commercial losses
Date of advice: 18 April 2017
Published: September 2017
Ruling period: Year ended 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ended 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2015

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 activity in your calculation of taxable income for the 2015-16 to 2020-21 financial years? | A1: Yes

Relevant facts and circumstances: Your income for non-commercial loss purposes for the financial years 2015-16 to 2020-21 is or is expected to be less than $250,000. You are carrying on a business (the activity) which commenced in 2015. The business is managed in partnership between yourself and your partner. The farm will supply the City A region with a variety of products, including varieties not usually available for sale, through a combination of direct sales at the weekly produce markets at in City A, weekly farmers markets, monthly markets in City B and direct food supply outlets in the City A region. The activity requires around five years to produce sufficient quantity of marketable goods for sale, to generate enough income to cover costs and return a profit. You have provided independent evidence that attests to a commercially viable period of five to seven years for your industry. You have provided your 2015-2022 business plan and budget forecasts for the 2016-17 to 2021-22 financial years. You have provided a profit and loss statement for the 2015-16 financial year. You expect to make a tax profit in the 2021-22 financial year.

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)(b)

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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 the business activity that there will be a period of time before it can be expected to pass one of the four tests ● there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that you will pass one of the four tests or make a tax profit within the commercially viable period for your industry. Therefore, the Commissioner will exercise the discretion in the 2015-16 to 2020-21 financial years.