Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 21 July 2016
Published: August 2016
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | 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)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production business (the activity) in your calculation of taxable income for the relevant financial years? | A1: Yes.

Relevant facts and circumstances: You and your spouse satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You and your spouse operate a primary production activity for produce A under a partnership arrangement. In 20XX you planted x number of trees of produce B. You employ farm hands and external contractors to assist in the activity. You intend on harvesting and sell produce B when trees come into production in approximately six years' time. You have provided projected profit and loss figures which indicate that the activity will pass the $20,000 assessable income test in the sixth year of operation, being the relevant financial year. Further the activity will be profitable in the same year.

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; or • the Commissioner exercises his discretion. You have requested the Commissioner to exercise his 'lead time' discretion for the relevant years financial years so that you are not required to defer any losses from your primary production business activity under the non-commercial loss provisions. The 'lead time' discretion may be exercised for the income years 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; and • there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that you will pass one of the four tests or make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business in your calculation of taxable income for the relevant financial years.