Private ruling: Commissioner's discretion relating to non-commercial losses
Date of advice: 14 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 33-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business in your calculation of taxable income for the income tax years ended 30 June 2016 to 30 June 2017 inclusive? | A1: Yes.

Relevant facts and circumstances: The following documents you provided form part of the scheme under consideration: • your private ruling application • evidentiary checklist • your business plan • profit projections You operate a primary production business which commenced in the relevant income year. You have provided details of your activity including the commencement date, location and scale of operations. You have provided information to show the commercially viable period for the activity is up to three years. You state that your primary production business will first make a tax profit in the 2017-18 income year. You do not satisfy the income requirement in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-10 and | Income Tax Assessment Act 1997 Section 35-55.

Reasons for decision: Summary: Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities. As your activity has commenced, and you state that it is carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997. Under the rules in subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be taken into account in an income year unless: • you satisfy the income requirement and you pass one of the four tests • the exceptions apply, or • the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement in subsection 35-10(2E) of the (ITAA 1997. You also do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. Under subsection 35-55(1) of the ITAA 1997, the Commissioner may, on application, decide that the deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because: (c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years: (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C). For the purposes of sub paragraph 35-55(1)(c)(ii), the 'commercially viable period for the industry concerned' is the time it takes for a business activity in a particular industry to become commercially viable or financially sustainable from the time it started. This will often be a period longer than the time it takes the business to first produce assessable income as the business activity may not be commercially viable at the time it first produces assessable income. As discussed in the above paragraph, the commercially viable period is determined on an industry basis. Subparagraph 35-55(1)(c)(ii) states there must be an objective expectation that within a period that is commercially viable for the industry concerned, the activity will either meet one of the tests or produce a tax profit. You have stated that the commercially viable period for your primary production activity is between one to three years. Based on your profit projections, your business will make a taxation profit in the 2017-18 income year. This is within the commercially viable period for this industry. Therefore, the Commissioner is satisfied that it is because of the nature of your activity that it will not produce a taxation profit for the 2015-16 and 2016-17 income years. As a result, the Commissioner's discretion will be exercised for the years ending 30 June 2016 and 30 June 2017. This means that any 'loss' from the activity can be taken into account in calculating your taxable income for those years.