Private ruling: Non-commercial losses and the Commissioner's discretion
Published: July 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can 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 the calculation of your taxable income for the 2013-14 financial year? | A1: No. | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production activity in the calculation of your taxable income for the 2014-15 financial year? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c)

Reasons for decision: Detailed Reasoning - 2013-14 financial year: In order for Division 35 of the ITAA 1997 to apply, a taxpayer must have commenced business. In determining when a business commences, there are three indicators that must be present before it can be said that a business has commenced. These are: • purpose, intention and decision; • acquisition of a business structure; and • commencement of business operations We must examine the above indicators in light of the characterisation of your business activity. In Goodman Fielder Wattie Ltd v. Federal Commissioner of Taxation 29 FCR 376; (1991) 22 ATR 26; 91 ATC 4438, where claims for business deductions prior to November 1982 were at question, Hill J stated: Critical to the resolution of the present controversy, is the characterisation of the business activity itself which is said to have commenced. It was conceded properly by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982... For example, for a primary production activity involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as a trading activity, involving conducting services in return for a fee, the business would generally be considered to have commenced once you begin conducting the services for a fee. As noted by Brennan J in Inglis v. Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that: The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. The information you provided clearly indicates that your purpose, intention and decision and the acquisition of a business structure were present. We consider that, during the 20YY financial year, your activities were preliminary to the carrying on of your intended business and you were still in the course of establishing a business. As the provisions of Division 35 of the ITAA 1997 are subject to a business being conducted the discretion at paragraph 35-55(1)(a) cannot be exercised in the 20ZZ financial year. | Detailed Reasoning - 2014-15 financial year: 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 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 you 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. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that will prevent you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise his discretion in the 2014-15 financial year.

Relevant facts: You purchased the property in 20XX. | You leased the property for agistment from when you purchased it until mid 20YY. | You are now leasing half the land until mid 20ZZ at which time all the land will be used for your business activity. | You are undertaking substantial improvements in relation to water, soil, pasture and infrastructure. | You purchased your first animals after 30 June 20YY. | First sales will be in late 20YY. | You have projected that your activity will achieve a profit in the 2015-16 financial year. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000.