Private ruling: non-commercial losses-Commissioner's discretion
Published: July 2013
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)(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 relevant financial year? | A1: No.

Relevant facts and circumstances: You commenced a primary production activity in 200X. The property included immature plants that had been planted a number of years prior to you purchasing the property. You expect to make a profit in the 2016-17 financial year. Prior to the relevant financial year, you satisfied the income requirement and pass the assessable income, real property and other assets tests of Division 35. During the relevant financial year you were unable to meet the income requirement as a termination payment made your income for non-commercial purposes above $250,000. Since 200Y, when you permanently occupied the property you have invested in improved infrastructure and equipment. During the initial years of owning the property the annual harvest was small due to the immature age of the crop. In the subsequent financial year you considered the plants were mature in terms of quality and volume. You have not provided information from an independent source that indicates when a commercially viable period would be reached in your primary production activity. We have obtained information indicating that plant maturity would be reached between four to five years after planting.

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 - subsection 35-55(1) | Income Tax Assessment Act 1997 - paragraph 35-55(1)(c)

Reasons for decision: Summary: For the 2009-10 and later financial 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. You received a one off payment in the relevant financial year that caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. While we appreciate your situation the discretion is not available to the Commissioner to disregard this one off payment when considering your losses in the relevant financial year. Therefore the relevant discretion may only be exercised for the financial 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. TR 2007/6 states that the 'lead time' discretion provided for by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made. Although you have not provided information from an independent source indicating the commercially viable period for your type of activity you have indicated a plant would be mature in terms of quality and volume after ten years. The information we have found shows that a plant would mature after a maximum of 5 years. Your plants were established a number of years prior to you purchasing the property and therefore were close to or had already reached maturity. Notwithstanding our information you have provided information that predicts you will make a profit in the 2016-17 financial year which is a number of years after you indicated the plants had matured in terms of quality and volume, Z years since you purchased the property and a number of years after planting. The Commissioner is not satisfied that Z years is the commercially viable period for your primary production activity and therefore will not exercise the discretion for the relevant financial year.