Private ruling: Commissioner's discretion
Published: August 2011
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012
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 activities in your calculation of taxable income for the 2009-10 to 2011-12 financial years? | A1: 


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: 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 the 2009-10 and 2010-11 financial years and you expect this will be the case in the 2011-12 financial year as well. 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. | Detailed Reasoning - Staggered planting: Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied. For example, in Scott v. Commissioner of Taxation [2006] AATA 542 , the court upheld the Commissioner's decision not to exercise the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years. The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis. In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the court expressed the following view: It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities. In your case you planted trees progressively over a two to three year period and you expect to make a taxable profit in the 2012-13 financial year or approximately XX years after you commenced. You have stated that adverse weather conditions had set back growth projections for the grove. However, the trees have now matured and have reached commercial production levels. Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is 15 years. The reason your activities made a loss is peculiar to your situation and is not inherent to the nature of the business. Where the 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 to 2011-12 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. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: Your primary production activities are carried out on a leased property. | For more than 20 years you have raised livestock for sale and more than 10 years ago you decided to expand your primary production activities and established a grove on the property. | The planting of seedlings commenced in 19XX and was completed in 20XX. Some supplementary plantings were required to replace losses due to frost and other weather conditions. The grove now has about XX,000 trees planted over XX acres. | During the development phase, like other primary producers, adverse weather conditions, such as drought and frost, set back both growth projections and the grove reaching commercial sales. | You have provided independent evidence which states that a commercial crop is not expected until trees are eight years old and peak production is not expected until the trees are fifteen years old. | You do not expect your grove activities to produce a tax profit until the 2012-13 financial year. | The property still carries livestock for sale annually, subject to weather conditions. | Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $250,000 and you expect this will be the case for the 2011-12 financial year as well.