Private ruling: Income tax - Tax losses - Non-commercial losses - Commissioner's discretion
Published: September 2014
Ruling period: Income year ended 30 June 2013 | Income year ended 30 June 2014
Date scheme commenced: The scheme has commenced

Ruling: Q1: Will the Commissioner exercise the discretion under paragraphs 35-55(1)(b) or 35-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include losses from your particular growing activity in the calculation of your taxable income for the income years ended 30 June 2013 and 30 June 2014? | A1: Yes, the Commissioner will exercise the discretion under paragraphs 35-55(1)(b) or 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your particular growing activity in your calculation of assessable income for the income year ended 30 June 2013 and 30 June 2014. As your specified growing activity is not expected to produce assessable income until the income year ending 30 June 2015, the Commissioner accepts that this period is within the lead time for the nut growing industry and that there is an objective expectation that the particular growing activity will make a tax profit within a period that is commercially viable for the industry.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are a Grower in a specific growing activity (the Project) that was expected to first produce a tax profit at the end of the sixth income year of the Project. In the income years following your application, you were obliged to pay further management fees, services fees, growing fees, incentive fees, processing and marketing fees, and land and assets rent. A Product Ruling issued for an arrangement related to the Project, but you could not rely on the Product Ruling because you did not participate in the Project in the way described in that Product Ruling. In order to offset your losses from the Project against your taxable income, you subsequently applied for a private ruling seeking the Commissioner's discretion under paragraph 35-55(1)(b) or 35-55(1)(c) of the ITAA 1997 up to and including the fifth year of the Project, and a private ruling exercising the discretion was issued. The Project is now expected to first produce a tax profit at the end of the eighth income year. For the class of entities to which the initial Product Ruling applied, the discretion provided under section 35-55 of the ITAA 1997 was extended to the for the sixth and seventh income years of the Project on the basis that this period was within the lead time for the particular growing industry. You lodged a private application and provided the following information: • Project documentation; • Revised cash flows for the Project; and • An Independent Expert report.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 section 35-10 | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 section 35-55 | Income Tax Assessment Act 1997 paragraph 35-55(1)(b) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: The Project was expected to first produce a tax profit at the end of the sixth income year of the Project. The Project is now expected to first produce a tax profit at the end of the eighth income year. A Grower who was accepted into the Project on the specific date and carries on a business of a particular growing individually (alone or in partnership) and is (or has) expected to incur losses from their participation in the Project for the sixth and seventh income years which will be subject to Division 35. These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year. In the income year ending 30 June 2010, an income requirement was introduced to Division 35 which applies to Growers in this Project. Where a Grower with income for NCL purposes of less than $250,000 (that is, the Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the Scheme described in this Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that: • it is because of its nature that the business activity of the Grower will not satisfy one of the four tests in Division 35; and • there is an objective expectation that within a period that is commercially viable for the specified growing industry, the Grower's business activity will satisfy one of the four tests set out in Division 35 or produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). For the sixth and seventh income years of the Project, where a Grower with income for NCL purposes of $250,000 or more (that is, the Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that: • it is because of its nature that the business activity of the Grower will not produce assessable income greater than the deductions attributable to it; and • there is an objective expectation that within a period that is commercially viable for the particular growing industry, the Grower's business activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). A Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000: • taxable income for that year (ignoring any loss arising from participation in the Project or any other business activity); • total reportable fringe benefits for that year; • reportable superannuation contributions for that year; and • total net investment losses for that year. In accordance with Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion when exercising the discretion , specifically Example 10 at paragraphs 141-151, it is considered that inherent characteristics have prevented the Growers from satisfying a test, or producing assessable income greater than the deductions attributable to it, in the sixth and seventh income years. It is considered that this period is within the lead time for the particular growing industry. As such, the business activity meets the requirements of subparagraph 35-55(1)(b)(i) or subparagraph 35-55(1)(c)(i) of the ITAA 1997. To satisfy the requirements of subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii) of the ITAA 1997 there needs to be an objective expectation that the business activity will satisfy a test or make a tax profit within a period that is commercially viable for the industry concerned. The information from the independent expert report and the revised cash flows provides evidence to supports a conclusion that there is an objective expectation that the Project is commercially viable. The business activity will have its first profitable year at the end of the eighth income year and therefore make a tax profit in that year, which will occur within the period referred to in subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii) of the ITAA 1997. In this case the Commissioner's discretion would be exercised for the sixth and seventh income years of the Project, as it would be unreasonable to apply the loss deferral rule.