Private ruling: Non-commercial losses - Commissioner's discretion - lead time
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
Date scheme commenced: 1 July 2011

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: Your income for non commercial loss purposes is above $250,000. You purchased a property in 20XX and the first of your stock were sourced to breed for sale. You will personally handle all transport and livestock will never be mixed with other stock at any stage. You planned to commence selling the stock in the relevant year however this was delayed until the subsequent year. You spend time working at the farm and also time is spent on the set-up of the sales side of the business and on your marketing and promotion. You have been working on setting up potential sales both in your local area and other areas. Once your production of stock allows you will be attending markets more often. You have not provided a commercially viable period for your type of primary production however we have information that show sales of stock would be feasible within a 12 month period. You could stock the property now but building up the stock is considered the better option as you build your clientele.

Relevant legislative provisions: Income Tax Assessment Act 1997 - section 35-1 | Income Tax Assessment Act 1997 - subsection 35-10(2E) | Income Tax Assessment Act 1997 - subsection 35-55(1) | 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 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. Paragraphs 74 to 78 of Taxation Ruling TR 2007/6 provide; 74. The note under paragraph 35-55(1)(c) states: Paragraphs (b) and (c) are 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. 75. Stone J in Eskandari confirmed this view when considering whether the Commissioner's discretion should be exercised in regard to losses incurred in a migration consultancy business. When looking at the type of activities referred to by the note and the EM, Stone J stated at FCA 31: Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 76. And further at FCA 32: In my view, the phrase 'because of its nature' in s 35-55 indicates that the failure must be a result of some inherent feature that the taxpayer's business activity has in common with business activities of that type. 77. Therefore, 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. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons. 78. 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. (Refer to Example 9 at paragraph 139 of this Ruling.) The note under paragraph 35-55(1)(c) and also paragraph 78 of TR 2007/6 does not support any view that the discretion should be exercised for any start-up activity that is yet to produce assessable income or meet the requirements of subparagraph 35-55(1)(c)(i) simply because of the small scale on which it was started, or because a client base is being built up. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a profit. It is your choice and business plan to gradually build up your stock as you continue to set-up the sales side of your business and on your marketing and promotion in an effort to build your clientele. The Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the relevant financial years.