Private ruling: Non-commercial losses - Commissioner’s Discretion: Lead Time
Date of advice: 13 June 2017
Published: October 2017
Ruling period: 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 brewing activities in the calculation of your taxable income for the 20XX-XX to 20XX-XX 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 are a sole trader running a brewing business. You commenced business operations in the 20XX financial year. From 20XX to 20XX the farm received extensive works to the land to prepare it for the planting of the apple trees. This included the following processes: a) the blackberry / bracken / corm grass must be removed (sprays) b) the tree stumps and roots from the original logging operations must be extracted and burned (deep root extraction is required, followed by extensive raking etc) c) the soil fungal balance must be restored to a normal system after years of fungal wood rot associated with the logging operation. This involves aeration through ploughing, chemical treatments to restore pH and mineral balances, and addition of beneficial fungi and bacteria in the form of natural compost d) a grass / clover crop established to stabilise the soils and provide legume hosts for nitrogen fixing organisms prior to planting orchards and ensure good soil health e) shelter belts of native trees planted to ensure orchard protection from winds, and to encourage development of suitable microclimates. In the 20XX-XX financial year the trees were planted. From 20XX to 20XX, the infrastructure to develop the orchard was progressively established, including irrigation and buildings, plus the purchase of equipment needed to tend to and harvest the orchards. The first (limited) commercial harvest took place in the 20XX-XX financial year. Once the fruit was harvested, it took a minimum of 20 months from harvest to the product being ready for sale. Your beverages have been manufactured using the following traditional methods dating back to 1644. a) harvest / crush (March 20XX) b) first ferment and on leis (December 20XX / January 20XX) c) tirage (January 20XX to November / December 20XX) d) riddling / disgorge / dosage (December 20XX). Once the beverage is “on leis” it must mature for a further nine months minimum before being ready for riddling, disgorging and tirage. Late spring is typically the earliest to open a bottle, to see what the “on the leis” process has imparted to the beverage, and determine the dosage requirements. Determining the dosage requirements involves setting up a tasting panel of beverage experts and providing a carefully measured range of options to them. This resulted in the beverage being bottled in January and February 20XX, to be bottled ready for sale in 20XX. Sales commenced in the cellar and online in February 20XX after a delay in obtaining the required approvals and licenses. You intend to make a tax profit in the 20XX-XX financial year. You have provided independent evidence that attests to a commercially viable period of 10 years for your industry.

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), and | 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 (paragraph 35-55(1)(c) of the ITAA 1997). 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. 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. Therefore, the Commissioner will exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997, in relation to your brewing business for the 20XX-XX to 20XX-XX income years.