Private ruling: non-commercial losses
Published: July 2011
Ruling period: Year ended 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
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 mixed farming business in the calculation of your taxable income for the 2009-10 to the 2013-14 financial years? | A1: 

Relevant facts and circumstances: You have worked in the primary production sector all of your life. You commenced your primary production business in 19XX. You reside on this farm which is debt free. You owned or leased a number of properties (at the date of application for a private ruling): Your current debt level is in excess of $2 million. You acknowledge that this amount of debt is the primary reason for the business losses. You are actively reducing debt for the 2011-12 financial year. You expect to reduce your total debt in the 2011-12 financial year. The following activity has been undertaken towards debt reduction; A Lot (XX acres) has sold, the proceeds have been applied to your loan. You were notified on that another Lot (XX acres) was under contract. Another property of is on the market a year earlier than planned to further reduce your debt. You have submitted a development application to the Council to subdivide and sell a lot on another farm to further reduce your debt. You have always combined the income and expenses for the primary production business, you are unable to separate the income and expenses of the individual farms. Your income for non-commercial loss purposes for the 2009-10 financial year exceeds $250,000. You expect that your income in future years will also be in excess of $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(c). Reasons for decision | 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 (relevant to this division): | · 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, excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. | 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). | The period that is commercially viable for the industry concerned is the period in which is it expected that any business activity of that type, which is carried on in a commercially viable manner, would be expected to produce a taxable profit. | Where the income requirement test is not met, there is only one discretion in the legislation that is applicable for a business starting up, that because of its nature there is lead time between the time you commence your business to when you can make a taxable profit (paragraph 35-55(1)(c) of the ITAA 1997). This is the new law that has to be applied for these cases to determine if the Commissioner can grant a discretion. | The explanatory memorandum to this new legislation explains that individuals: | ….must demonstrate that the reason they do not or will not make a profit is because of the nature of the business and not for some other reason which is peculiar to that individual's particular business. | The individual is required to establish objectively the commercially viable period for the industry concerned. | You purchased the main farm in 19XX and commenced your primary production activities. You purchased four more properties between 20XX and 20XX and leased land to expand your primary production activities. The income from the various crops and cattle sales has always been combined, the expenses have not been separated or attributable to any one farm. Your bank loans have been a contributing factor to your losses. | You provided a report stating that your projected gross margins are commercially realistic when compared to similar enterprises in the district. The commercially viable period for the cattle industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached saleable age. The commercially viable period for beef farming is generally 2 to 3 years. The commercially viable period for annual or biannual cereal crops is one year. | In your projected income and expenditure statement you have projected that your business activity will be profitable in the 2010-11 financial year this is XX years after your business began. This is considered to be outside the commercially viable period for cattle farming and for farming cereal crops. The reason your business activity is currently producing a loss is due to the restructuring and continued expansion of your business 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. | You have been unable to produce a tax profit from your combined cropping and farming business activity within a commercially viable period 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 2013-14 financial years.


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