Private ruling: Non Commercial Losses - Commissioner's Discretion
Date of advice: 12 May 2016
Published: June 2016
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ | Year ended 30 June 20VV
Date scheme commenced: 1 October 20XX

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 livestock breeding enterprise in the calculation of your taxable income for the 20XX-YY and 20YY-ZZ income years? | A1: Yes | Q2: 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 livestock breeding enterprise in the calculation of your taxable income for the 20ZZ-VV income year? | A2: No

Relevant facts and circumstances: You acquired a property in 20XX with the intention of creating a productive livestock and crop growing enterprise. The property has frontage to a river, water rights and grazing licenses. The property was previously set up for backgrounding livestock and has relevant infrastructure. You intend to lift the productivity of the property through upgrading pastures and stock water via troughs rather than dams. You intend to build the herd of livestock and grow out a number of yearlings per year for market. You intend to re-sow crops to increase the yield per hectare and grow these crops for use and sale. The projected income for the year ending 30 June 20VV shows that the business will make an operating profit in the 20VV financial year.

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

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. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000. 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 (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, it is accepted that it is in the nature of livestock breeding and grazing that there will be a lead time before the activity will produce assessable income greater than the deductions attributable to it for that year. The commercially viable period for the livestock industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached saleable age. The commercially viable period for livestock breeding is generally two to three years. Based on this, your livestock breeding activities should become commercially viable in the 20ZZ-VV financial year. 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 for the 20XX-YY and 20YY-ZZ financial years. As the financial information you provided shows that your business activity should produce a profit in the 20ZZ-VV financial year, the Commissioner is unable to exercise the discretion for this year.