Private ruling: non commercial losses - Commissioner's discretion
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2008

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 the 2013-14 years of income? | A1: 

Relevant facts and circumstances: You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year. In mid 2008 you commenced a mixed farming operation. The main activity is livestock production. Whilst building the herd you will not earn income from the sale of the livestock. You also have a small amount of cropping and employ two full time and one part time worker. When you moved from a previous farm to the current property you brought with you a herd of livestock. This livestock formed the basis of your new breeding business. In 2010 you purchased more livestock to build the herd. You are building the herd to approximately 1,200 head by keeping all females therefore foregoing approximately 50% of potential revenue. With a full compliment of over 1,200 head and allowing for joining, birth and then growth you expect the farm will be fully profitable by the 2014-15 year of income. The move to the current property meant considerable borrowing, which will impact on profit for the next five or more years. You are also expecting to reduce debt gradually over the next five years. The special features that require time to reach profit are: · herd building and production has a multi-year lag. · you invested and borrowed significantly on the strength of your off farm income and success. The drought and the floods did not significantly affect the current property. A reduction of costs will be made from the 2008-09 year of income to the 2010-11 year of income by targeting: · Finance costs (reducing debt). · Staff cuts. · Fertiliser costs (due to reduced cropping). · Fuel and chemical (due to reduced cropping). · No investment in machinery. The reduction of costs is expected until the 2014-15 year of income, that being first year of profit. An independent source states the industry standard for a commercially viable period to generate a trading profit is five years.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to the 2013-14 years of income on the basis that your primary production activity will not produce a tax profit within the commercially viable period for your industry. | Detailed Reasoning - Detailed reasoning: Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements. for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years: (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C). The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied 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. You have provided objective evidence that the commercially viable period to make a tax profit for your type of activity is five years. You will not be commercially viable until the seventh year since commencing your activity. Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.