Private ruling: Non-commercial losses
Published: March 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

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 in your calculation of taxable income for the relevant financial year? | A1: Yes.

Relevant facts and circumstances: You bought a farm in the latter part of the relevant financial year. The farm had no livestock on it when you purchased it. You generated limited income in the relevant financial year as you prepared the farm to accommodate the livestock. The major expenses you incurred were temporary water and the purchase of fodder seed. You purchased livestock in the subsequent financial year and expect the turnover from sales to be approximately $X in the subsequent financial year. Your income for non-commercial loss purposes will be less than $250,000 in the excluded years.

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 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. 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 an initial 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. Paragraph 98 of TR 2007/6 states; … and to cater for those business activities which do not commence right at the start of a particular income year, but towards the end of that year, a tolerance of at least one year beyond the income year otherwise identified as the end of this period will be applied… In your circumstance you purchased a livestock bare farm late in the relevant financial year and therefore could not reasonably be expected to pass a test until you purchased suitable livestock which you did in the following financial year. You expect to pass a test in the subsequent financial year and therefore a tolerance of at least one year beyond the income year otherwise identified as the end of this period will be applied. Consequently the Commissioner will exercise his discretion for the relevant financial year.