Private ruling: Non-commercial losses - Commissioner's discretion
Published: July 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2000

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 years? | A1: No.

Relevant facts and circumstances: You expect that your income for non commercial loss purposes will exceed $250,000 in the relevant and subsequent financial years. You pass three of the four tests contained within Division 35 of the ITAA 1997. You own and operate a primary production business and have done so since the 200X financial year. You commenced your business in 200X on a very small scale however in the 200Y financial year you decided to make an investment of significant capital to introduce new stock and employ a manager. You have supplied a letter from an independent source that specifies that in your business a profit could be expected in 10 to 15 years of commencement. You expect your business to make a tax profit in the 201Z financial year.

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 paragraph 35-55(1)(c) | Income Tax Assessment Act 1997 subsection 35-10(2E)

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. 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 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 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. Taxation Ruling 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. Applicant 1761 of 2011 v. Commissioner of Taxation [2011] AATA 779 at paragraph 27 concludes the commercially viable period for an activity is measured from the commencement of the business activity. You have conducted a primary production activity since the 200X financial year which is considered to be the commencement date for your business activity. An independent source specifies that in your business type a profit could be expected in 10 to 15 years of commencement therefore a tax profit would be expected in the 201Y financial year. However you show that a profit will not be made until the 201Z financial year which is three years outside the commercially viable period. The Commissioner will not exercise the discretion for the relevant financial years.