Private ruling: Non-commercial losses – Commissioner’s discretion
Published: August 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2009

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 2009-10 to the 2013-14 financial years? | A1: No.

Relevant facts and circumstances: Your income for non-commercial loss purposes is greater than $250,000. Since the purchase in 19XX the farm property has always held stock and conducted cropping operations. The business plan put into action was to reinvest into the farm and restore it back into a modern and profitable mixed farming business. This process was well under way by the 200X financial year but the significant cost of the re-development is spread out over the following number of years. The property entered into intensive planting operations for the first time during the 19XX year and has continued annually with seedlings planted every year. The earliest planted crops are ready for harvesting and can be harvested at any time. No crops have been harvested to date apart from the thinnings carried out at regular intervals. Crops can be harvested between 15 to 100 years of planting. You expect your first crop harvest in the 20XX financial year. Livestock have always been a feature of the operation and it is expected that returns from livestock will increase dramatically over time with improved management of pastures. The farming layout and soil profiles are most suitable for intensive cropping operations, including vegetable and other crops such as lucerne, silage and grains. You have provided financial statements for the relevant financial years showing no profit had been made in that period. Projected statements from the future financial years first show a profit in the 20YY financial year. You have not provided independent evidence showing what the commercially viable period is for your type of primary production. However you have provided the expected growth period for a variety of crops.

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 subsection 35-10(2E) | 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. In your situation, you do not satisfy the income requirement and do not come under any of the exceptions. 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. The following has been extracted from paragraphs 77 and 78 of Taxation Ruling TR 2007/6 to provide the meaning of ‘because of its nature’: The phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity and would not result in the requirements of subparagraphs 35-55(1)(b)(i) and (c)(i) being met. You commenced your farming activities in 19XX on the properties that always held stock and conducted cropping operations. In this year you entered into intensive planting operations that have continued annually. You made significant investments to restore the farm into a modern and profitable mixed farming business. This process was well under way by the 200X financial year. Paragraph 79 of TR 2007/6 states: The inherent characteristics may be present for an initial period from the time the business activity commences. After that initial period has elapsed, which can be several years, the inherent characteristics may cease to be the cause of business activities of the type in question being unable to satisfy any of the statutory tests. The Tribunal in Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779 stated at paragraph 22 and 24: …do not support a conclusion that it is in the nature of the activity of beef cattle production that it takes more than two decades or anything like that to produce assessable income greater than the deductions attributable to it. There is nothing in the Seer report which would support such a conclusion. Instead, what is revealed by the facts comprising the “scheme” is a series of idiosyncratic, managerial choices made by the Applicant as to how to go about the business activity. That he was able to continue the business activity for all of these years and to make these choices was not, on the evidence, because of the nature of that business activity at all but rather because of his ready access either to funding from his own other resources or from external financiers. These have enabled him to expand his property holdings, to improve his properties and progressively to acquire particular plant and equipment. The Applicant was and remains perfectly entitled to make such choices in conducting his business activity. However, not every managerial reaction to events encountered in the course of a business activity or measure designed to achieve economies of scale is to be regarded as having occurred because of the nature of that activity. Our conclusion is that the criterion specified in s 35-55(1)(c)(i) is not satisfied in respect of any of the excluded years for the business activity conducted by the Applicant. The failure to make a profit is not due to the inherent characteristics of a primary production activity rather it is the consequences of your business choices, and more recently making significant investments to restore the farm back to a modern and profitable mixed farming business with significant capital input costs. Paragraph 35-55(1)(c) of the ITAA 1997 has two criteria that must each be satisfied. The conclusion that the first criterion has not been met, in that the failure to make a tax profit in your primary production activity is not an inherent characteristic of your primary production activity means that it is not necessary to consider whether the second criterion, regarding the commercially viable period, has been met. However the comments of the Tribunal in Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779 paragraph 27 explains how this period is viewed: …whether, as a matter of objective expectation, the Applicant’s business activity will produce the excess of assessable income specified. In so doing, we must act on objective evidence where available. On that evidence, six years is a commercially viable period. But that period runs from when the business activity commences… The commencement of the commercially viable period started with the acquisition of the property in 19XX. If there was a primary production activity carried on prior to your purchase of the property then the commercially viable period commenced prior to you purchasing the farm. You have not provided any independent evidence of the commercially viable period for this primary production activity. However, taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business activity is 31 years notwithstanding an increase in profit from the crops in the 34 th year. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the years in question.