Private ruling: Non-commercial losses - Commissioner's discretion - lead time
Date of advice: 23 August 2016
Published: September 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the relevant financial year. | A1: Yes.

Relevant facts and circumstances: You carry on the business activity of breeding and selling progeny of breeding stock, which business commenced in 20XX. Upon commencement you did not have any progeny on the ground. You had net losses in the relevant financial years. You estimate that you will return a tax profit in the financial year ending 30 June 20XX. Your income for non-commercial loss purposes in the financial year ending 30 June 20XX was $250,000 or more.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 subsection 35-10(4) | Income Tax Assessment Act 1997 subsection 33-55(1)(c)

Reasons for decision: Summary: Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents losses from non-commercial activities that are carried on as businesses by individuals (alone or in partnership) being offset against other assessable income in the income year the loss is incurred. The rule in subsection 35-10(2) of the ITAA 1997 defers losses from business activities unless: a) you satisfy subsection 35-10(2E) of the ITAA 1997 (income requirement) and pass one of the four objective tests contained in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; b) an exception applies; or c) the Commissioner exercises a discretion set out in section 35-55 of the ITAA 1997 for the business activity for that year. To satisfy the income requirement your taxable income, reportable fringe benefits, report superannuation contributions and total net investment losses for that income year must be less than $250,000. You did not meet this income requirement in the relevant financial year. Further, the exceptions contained in subsection 35-10(4) of the ITAA 1997 do not apply as your assessable income from other sources is greater than $40,000. On the facts provided, to allow losses from your business activity to be offset against your other income, you must rely on the Commissioner exercising a discretion set out in section 35-55 of the ITAA 1997. Commissioner's discretion Paragraph 35-55(1)(c) of the ITAA 1997 provides that the Commissioner may exercise a discretion not to apply the loss deferral rule in section 35-10 where the income requirement is not met and a tax profit is not produced because of the nature of the business activity. This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides guidelines on how the discretion may be exercised to determine that it would be unreasonable for the loss deferral rule to apply. Three elements must be satisfied to be eligible for the exercise of this discretion: a) the business activity must have started to be carried on; b) it is because of the nature of the activity that the activity has not, or will not produce a tax profit; and c) the individual can show that there is an objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will produce a tax profit. The Commissioner accepts that you carry on the business activity of breeding and selling progeny of your breeding stock, which business commenced in 20XX. In relation to the second element, for the failure to produce a tax profit to be 'because of its nature', the failure must be because of some inherent characteristic that the tax payer's business activity has in common with other business activities of that type. The Commissioner accepts that the business activity of breeding and selling progeny of, breeding stock would be an activity where a period would pass before the activity could be expected to produce a tax profit, as it would necessarily include gestational periods and initial rearing. The initial inability to produce a tax profit typifies the industry overall, rather than just your particular business within that industry. You state that you expect to make a tax profit in financial year ending 30 June 20XX, within 2 to 3 years of starting your operation. The Commissioner accepts that this is a commercially viable period for the industry. Consequently the Commissioner will exercise the discretion not to apply the loss deferral rule for the relevant financial year.