Private ruling: Commissioner's discretion for non-commercial losses
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

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 business activity of livestock fattening in the calculation of your taxable income for the 2011-12 financial year? | A1: No.

Relevant facts and circumstances: You commenced a livestock fattening activity in the 2011-12 financial year and since commencing you have sold stock and received an income. You buy your livestock and over a period of some months you grow it to a marketable size before selling. You are in the process of building more infrastructure with the view to increasing your stocking level. You sell your product regularly and there is a turnover of stock on an ongoing basis with new product being purchased regularly. You intend to make $20,000 in assessable income in the 2012-13 financial year. You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

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 income years, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless: · you satisfy the <$250,000 income requirement and you pass one of the four tests; · the exceptions apply; or · the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the <$250,000 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; and · 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. This discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income, for example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. The note above does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or because a client base is being built up. Having regard to your full circumstances, it is not accepted that it is the nature of the business activity that has prevented one of the four tests being passed. The activity did not meet the $20,000 assessable income test because of the small scale on which it was started. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997.

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