Private ruling: non-commercial losses
Published: February 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: During 2008

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 2010-11 to 2013-14 financial years? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are the application for private ruling and all supporting documentation attached. You do satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business primarily devoted towards the growing of olives for olive oil production. The majority of olive trees on the property are capable of producing fruit. There are some younger trees. The olive grove, at the time of purchase, was in a state of neglect and the irrigation system in disrepair. When you first purchased the property you were very optimistic about the quantity of fruit your olive grove would produce. The reasons you submit as to why you have not been able to achieve your projected harvest figures are as follows: · The estimate did not take into account the alternate fruit bearing which is a known behaviour of olive trees. This effectively halved your projected production. · You initially hand harvested the fruit which proved far too slow to harvest in a timely manner. You now have three mechanical harvesters, however due to shipping delays you did not take delivery of the machines until the end of last season. · The previous estimate of fruit harvest relied on irrigation and fertilisation. You made the decision to farm dry land, thus reducing costs and being more environmentally sustainable. Your aim is to be able to market your product as organic olive oil. · The young trees did not produce the quantity of fruit as expected. You submit that because of the historically low world olive oil prices it has been difficult for you to secure sales. However you were able to attain your target price in low volumes. You have subsequently ceased your current employment and spend all your time at the olive grove.

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)(b)

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 satisfy the income requirement and you pass one of the four tests · the exceptions apply · the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 the business activity that there will be a period of time before it can be expected to pass one of the four tests · there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. This discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. The discretion is not intended to be available in cases where the failure to make a profit is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - such as the hours of operation, location, climate or soil conditions, or the level of debt funding. In your case when you purchased the majority of the olive trees on the property were mature trees capable of producing fruit and generating income. As you purchased a property with established olive trees the lead time for your activity has passed. This reasons as to why you were not able to achieve a commercial harvest was due to individual circumstance affecting your particular business activity, such as your harvesting technique and your decision to farm dry land, rather than an inherent characteristic that affects all businesses in the industry. Therefore, the Commissioner is unable to exercise the 'lead time' discretion in paragraph 35-55(1)(b) of the ITAA 1997 with respect to the 2010-11 to 2013-14 financial years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.