Private ruling: Non-commercial losses-Commissioner's discretion
Published: April 2013
Ruling period: Year ended 30 June 2012 Year ended 30 June 2013
Date scheme commenced: 1 July 2011

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 farming activity in your calculation of taxable income for the 2011-12 to the 2012-13 years of income? | A1: Yes.

Relevant facts and circumstances: You are in a partnership in a primary production business and until stock numbers have been built up to significant numbers the business will not make a profit. Projections have been made that within two to three years the business will be profitable. You are breeding and selling livestock and smallgoods direct to customers. The business prior the commencement date was conducted as a hobby but after doing projections of profits you decided to increase the number of breeding livestock on hand and conduct a commercial business. Projected turnovers show a profit will made in the 2013-14 year of income. You have no independent source to provide a period within which a profit would be made in your type of industry. Your income for non commercial loss purposes is above $250,000.

Relevant legislative provisions: 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. The income requirement is set out in subsection 35-10(2E) of the ITAA 1997. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. 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 (CVP) (paragraph 35-55(1)(c) of the ITAA 1997). In your case, you do not meet the income requirement as your income for non commercial loss purposes is above $250,000. However, although you have not supplied independent evidence as to CVP of the industry you have supplied evidence that establishes that your business activity will produce assessable income greater than the deductions attributable within three years. This period is considered to be that which would be commercially viable for this industry. Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income.