Private ruling: non commercial losses
Published: August 2011
Ruling period: Year ended 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2002

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 2009-10 to 2012-13 financial years? | A1: 

Relevant facts and circumstances: You purchased a property with the intention of establishing a primary production business. You have submitted independent evidence which states that it takes approximately 10 years for your type of crop to reach maturity. You expect to make a tax profit 10 years after your first planting. You income for non commercial loss purposes is over $250,000.

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 meet 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. Taxation Ruling TR 2007/6 discusses non commercial losses and the application of paragraph 35-55(1)(b) . Paragraph 84 of the Ruling states: The Commissioner needs to be satisfied that there is an objective expectation that the business activity will satisfy a test or produce a tax profit in some future income year falling within a period that is commercially viable for the industry concerned. If the business activity is not expected to satisfy a test or produce a tax profit within this period then the discretion will not be exercised. The longest period to date for which the Commissioner has exercised his discretion under paragraph 35-55(1)(b) of the ITAA 1997 for equivalent business activities in your industry is six years. The exercise of the discretion for six years recognised the fact that many of these businesses commenced towards the end of the income year. The granting of six years was considered to be reasonable and reflected the maximum period within which any business activity of the relevant type, carried on in a commercially viable manner, could be expected to satisfy one of the four tests in question, or produce a tax profit. The granting of the discretion for this period is also broadly consistent with Tribunal cases that have discussed lead time in your industry when deciding whether the taxpayer will pass one of the tests or produce net taxable income within a period that is commercially viable for that industry. In Scott v. Commissioner of Taxation [2006] AATA 542, Delacy v. Federal Commissioner of Taxation [2006] AATA 859; 2006 ATC 2119; (2006) 62 ATR 1053 and Hall v FC of T [2006] AATA 360; 2006 ATC 2356; 64 ATR 1001 it was accepted that the commercially viable period for your industry was between 4 and 6 years. In your case, you planted your first batch of trees in the 2003-04 financial year and expect to make a tax profit in the 2012-14 financial year, ten years after your first planting. You have submitted testimony from an independent source that estimates it takes approximately 10 years for your type of crop to reach maturity, however the commercially viable period for a primary production industry does not necessarily extend to the point where planting reach full maturity. As discussed above, a significant body of Tribunal cases exist to attest to the fact that the commercially viable period within your industry is significantly less than 10 years. Having regard to your full circumstances it is concluded that you have not provided any substantive evidence that would convince the Commissioner that he should exercise of his discretion under paragraph 35-55(1)(b) in relation to your business activities as you will return a profit outside the commercially viable period for your industry.

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