Private ruling: Non-commercial losses - Commissioner's discretion
Ruling period: Year ended 30 June 2010
Date scheme commenced: 17 November 2009

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 fruit growing in your calculation of taxable income for the 2009-10 financial year? | A1: Yes.

Relevant facts and circumstances: You commenced a business of growing fruit in the 2009-10 financial year. The property was acquired in the 2009-10 financial year but the fruit trees were planted by its original owners several years ago. The trees have produced income already and were harvested recently but the produce may not be sold until the 2011-12 financial year. The prior owners had neglected proper fertiliser programs and the upkeep of the property and had not invested in capital equipment (particularly a new irrigation pump and associated works). When the property was purchased, although the trees had been planted for several years, their growth was stunted by a number of years. It was assessed that the water applications did not cover the water requirements for a fully irrigated property to reach full potential and implementation of a new irrigation program was recommended and put in place. Prior to purchase, a number of trees had also been damaged. These have been re-staked. You expect to make a tax profit from your business in the 2010-11 financial year (year X since first planting). Independent information provided states that your variety of fruit trees are generally three to four years old at the time of their first harvest, with a range from two to ten years. The first harvests yield small quantities of fruit and commercial harvests were reported from trees of most varieties when trees are around five to six years old, although this may be variable and depend on factors such as variety and region. Your adjusted taxable income for non-commercial loss purposes for the 2009-10 financial year was more than $250,000.


Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2009-10 financial year. In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997). For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. You have provided evidence from independent sources that indicates that under normal circumstances, first commercial harvests were reported from trees of most varieties when trees are around five to six years old but that this may vary depending on factors such as variety and region. You state that when you purchased the property in the 2009-10 financial year the growth of the trees was stunted by one to two years, so in your case your first commercial harvest could be expected when the trees are around eight years old. You state that your business activity will produce income greater than deductions attributable to it in the 2010-11 financial year or ten years after the first trees were planted and within two years of your first commercial harvest. Based on the evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater that the expenses attributed to it. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your fruit growing enterprise for the 2009-10 financial year.

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