Private ruling: Non-commercial losses
Published: July 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

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 business activity in the calculation of your taxable income for the 2013-14 to the 2014-15 financial years? | A1: No.

Relevant facts and circumstances: Your business is a primary production activity that encompassed plantings over several years. You employ casual staff to operate the farm and you have provided that the commercially viable period for the industry is 10 years. You have just begun biodynamic farming methods which will eventually allow you to increase your prices and turn a profit however to date the activity has not produced a profit. You do not meet the income requirement of Division 35 of the ITAA 1997.

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)

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 and do not come under any of the exceptions. 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. Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied. As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542 ( Scott's Case ) , the Administrative Appeals Tribunal (AAT) upheld the Commissioner's decision in not applying the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years. The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis. In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the AAT member expressed the following view: It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities. In your case, you made plantings over several years and you have stated that the commercially viable period for your industry is ten years which means that you should have expected to make a profit in the 200X financial year. Whether by using the generally accepted period or your estimate, your activity will not produce a tax profit within a commercially viable period. It is considered that your case is similar to Scott's Case and the reason that a profit is not produced within the commercially viable period is because you did not fully plant out the property but rather, you staggered your plantings. Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 with respect to the 2013-14 to the 2014-15 financial years.