Private ruling: Non-commercial losses
Date of advice: 3 October 2017
Published: February 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | 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 ( ITAA 1997) to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 20XX to 20XX financial years? | A1: Yes.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business activity as a partnership. The business is primarily concerned with the cultivation of a product. You commenced business operations in the 20XX financial year. You took delivery of XXXX specific trees in mid-20XX to be planted. Subsequently the trees were tested and it was discovered that XXXX of the trees were infected with a less desirable, but more competitive form the product. The first trees were planted in late 20XX. The contaminated trees were removed and returned to the supplier, who could not replace them until the following year. When the new trees arrived, samples from each batch were taken and submitted for testing. This was conducted. These tests showed that the new batches of trees were well suited to production. You have since planted a total of XXX trees across XXXX hectares. The farm is operated by you and your partner with 2 permanent casual horticulturalists. You first produced a small amount of product in July 20XX, which is not common for the industry. You have provided independent evidence that attests to a commercially viable period for your industry. You intend to make a tax profit in the 20XX financial year. You have based the projected income figures on a wholesale price of $XXXX kilogram, increasing by 2.5% per annum. The below table illustrates your projected income figures: Year Price/Kg Income 20XX $XXXX $XXXX Actual 20XX $XXXX $XXXX Projected 20XX $XXXX $XXXX Projected 20XX $XXXX $XXXX Projected 20XX $XXXX $XXXX Projected You have provided a profit and loss projection statement that shows a tax profit should be made from year XX (20XX financial year) onwards.

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 (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 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. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise his discretion in the 20XX – 20XX financial years.