Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 28 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your farming business activity in the calculation of your taxable income for the 2014-15 financial year? | A1: Yes.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. In 2015 you commenced a crop farming business under a partnership entity. Your partner owns the land on which the farm is conducted. The best time to sow your crop is April to June, and as your crop requires up to six months of growing time before it can be harvested, expenditure is incurred in a different financial year to income from the sale of the crop. You planted your crop towards the end of the relevant financial year. You intend to sell the crop after it is harvested in the subsequent financial year. There is a partnership agreement in place to share the revenue from sales of the crop. The agreement also states that you will pay all the input costs, as your partner is providing the land on which you conduct the farming activity. Estimated income from the business activity for the subsequent financial year is based on expected tonne per hectare yield. With a conservative estimated of your crop yield, you will page a profit during the subsequent financial year. You have advised of a lead time of one year between the planting of the crop to harvest.

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)(c)

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 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, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year 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 • 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 you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise his discretion in the relevant financial year.