Private ruling: Non-commercial losses- Commissioner's discretion
Published: May 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
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 and the 2010-11 financial years? | A1: No.

Relevant facts and circumstances: Your primary production activity commenced in 2004. Your income for non commercial loss purposes is above $250,000. The losses in the 2009-10 and the 2010-11 financial year were due mainly to the significant depreciation amount. You made a profit in the 2011-12 financial year and expect another profit in the 2012-13 financial year. In previous years imports have kept prices down but in the 2011-12 financial year prices increased. In the 2012-13 financial year you are expecting a profit. You have no information from an independent source to state that the lead/commercially viable period for this type of industry is 7 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non - commercial loss purposes is above $250,000. In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. You have not provided any independent evidence of the commercially viable period for this business/industry, 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 7 years. The reason your business activity produced a loss is the costs incurred in producing your product far out weigh the income the product it is capable of producing and this is peculiar to your situation and is not inherent to the nature of the business. Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore 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 2009-10 and the 2010-11 financial years.