Private ruling: Non-Commercial Losses - Lead Time
Published: October 2014
Ruling period: 2013-14 income year | 2014-15 income year | 2015-16 income year | 2016-17 income year | 2017-18 income year | 2018-19 income year
Date scheme commenced: The 2013-14 income year

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 the inclusion of any losses from your business activity in the calculation of taxable income for the 2013-14 to 2018-19 income years? | A1: Yes

Relevant facts and circumstances: Although the business activity will not satisfy any of the tests set out in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) of the ITAA 1997 in the 2013-14 to 2018-19 income years, the income test under section 35-10(2E) is satisfied. The property already had trees planted when purchased in 20XX. Following the purchase of the property, further trees had been planted which were not a part of any enterprise. A decision then was made to plant new trees as part of a commercial enterprise. The partnership was formed to carry out this enterprise, you are a partner in this partnership, and you advise that from July 2013 the partnership has been carrying on a business of growing and harvesting of trees suited to the specific production, for ultimate purpose of harvesting and selling the products. A total of less than 3000 trees have been planted as part of the business. Independent evidence prepared by the relevant Growers of Australia Inc. in 2007 was provided. It examines the propagation and establishment of trees for specific production. The letter from the president of the relevant Growers of Australia Inc. states that it is common practice in the industry to consider full commercial production timing to be seven years. You provided an initial cash flow forecast in August 2014 showing that a tax profit would be made in the 2017-18 income year. Following a discussion with your tax agent, a new annual cash flow document was provided in September 2014 showing that a tax profit is likely to be made in the 2019-20 income year. A document was received in October 2014 confirming that the requested period for the Commissioner to exercise the discretion was for the 2013-14 to 2018-19 income years. A fax was received in October 2014 confirming that you are carrying on a business and the business commenced in July 2013. In your private ruling application, you are seeking a ruling for the period from 2013-14 to 2018-19 income years. This ruling is provided on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. If so; no entity will be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 35-55(1)(b) | Income Tax Assessment Act 1997 Subsection 35-10(2) | Income Tax Assessment Act 1997 Subsection 35-10(2E) | Income Tax Assessment Act 1997 Subsection 35-10(4)

Reasons for decision: Summary: Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless: • the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies • one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met (together with an income requirement), or • if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. As your agricultural activity has commenced and is carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997. Information you provided indicates that your activity is not able to satisfy one of the tests or produce a taxation profit, and is unlikely to do so in the 2013-14 to 2018-19 income years. Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable to defer the loss. The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where: i. the business activity has started to be carried on; and for those income years ii. because of its nature it has not met one of the tests set out in Division 35 of the ITAA 1997, and iii. there is an expectation that the business activity of an individual taxpayer will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned. The question of whether you are carrying on a business is a question of fact and degree. You have stated that you are carrying on a business and that the business commenced in July 2013. It is accepted that it is in the nature of activity that there will be a lead time before a profit can be expected or one of the tests passed, and that it is because of the nature of your activity, that it will not be able to satisfy one of the tests in the 2013-14 to 2018-19 income years. The information and the independent evidence you have provided demonstrates that there is an objective expectation that your business activity will make a profit after the 2018-19 income year. The Commissioners discretion under paragraph 35-55(1)(b) of the ITAA 1997 has been granted for the 2013-14 to 2018-19 income years.