Private ruling: Non-commercial losses - lead time
Date of advice: 22 September 2025
Published: 10 November 2025
Ruling period: Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX
Date scheme commenced: July 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 primary production business activity in your calculation of taxable income for the 20XX-XX to 20XX-XX financial years? | A1: No.

Relevant facts and circumstances: You do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a XX farming business at the Farm. The Farm is owned by your parents. The size of the Farm is X acres. The Farm was a XX farm. For approximately the past X years, X acres of the Farm has been leased to Lessee 1. Until June 20XX, another X acres was leased to Lessee 2. These entities used the Farm as a xx cattle farm. You commenced business operations in the 20XX-XX financial year. The block which was leased to Lessee 2 (the Block) is now being leased to yourself to conduct your own farming activities. You occasionally rely on your parents for assistance. You are now using the Block as xx farmland. There was significant investment required to convert the acreage to be suitable for xx farming. Financial outgoings included significant tillage, spraying, fence removal, planting costs and irrigation costs. Included in your business plan is your xx production cycle. In general, from XX to XX each year, the xx is harvested. The xx is then sent to the mill and is processed. The fibre that remains at the end of the processing is then used. Any excess from this is then fed back into xx work. New xx is then planted, fertilised and sprayed. In general, from XX to XX each year, the xx is grown and weeds are sprayed. In June 20XX, you planted the first stand of xx on the Block. Throughout the first year of xx farming on the Block, there were significant planting costs, amounting to approximately $X per acre. Your costs were of significance compared to most xx farmers as you typically operate the farmland without assistance. Therefore, you incurred significant subcontractor costs. In June 20XX, the first stand of xx was harvested. In November 20XX, Lessee 1 will be notified their lease on the Farm will cease. In this month, you will take over the entire farm. You will purchase the Farm for $X. The purchase will be financed by a $X state rural and industry development authority first start loan and a $X vendor loan. You will have to pay principle and interest on these loans. You also intend to use the remaining farmland as xx farmland. You will be required to convert the remaining farmland to be suitable for xx farming. This will require significant investment, especially because the farmland is currently in a dilapidated state. You will use the harvested xx from the Block to plant xx on the remaining farmland. Therefore, you will be replanting the same xx and will not generate any income in this instance. In April 20XX, the xx on the remaining farmland will be planted. Until this occurs, you will continue to pay lease payments to your parents. You also work a fly-in-fly-out occupation. Your taxable income from this occupation is greater than $X. You need to continue working this occupation to finance the purchase of the Farm. In the meantime, you will have a low maintenance crop. You have used your neighbour's income form growing xx as a baseline for your projected cashflows. Your projected cash flows have been reviewed by your neighbour, your accountant and the state rural financial service. Evidence provided from an information document indicates 'When the crop is harvested (normally 12 to 18 months after planting), the next or first ratoon crop is produced from the buds remaining on the underground portions of the stalk'. From the 20XX-XX to 20XX-XX financial years, you are expecting to incur losses from your business activity. For these years, you are therefore asking for the Commissioner to exercise a discretion to allow the losses from your business activity.

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)(b)

Reasons for decision: Summary: Having regard to your full circumstances, it is not accepted that there is anything inherent in the nature of your business activity that prevents it from making a profit within the commercially viable period for the industry. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the 20XX-XX to 20XX-XX financial years. | Detailed Reasoning - Detailed reasoning: Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless: • the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a) of the ITAA 1997), • an exception in subsection 35-10(4) of the ITAA 1997 applies, or • the Commissioner exercises the discretion in subsection 35-55(1) of the ITAA 1997 for the business activity for 1 or more income years. In your situation, none of the exceptions would apply and you do not satisfy the income requirement. Your business losses are therefore subject to the deferral rule, unless the Commissioner exercises their discretion. You have requested the Commissioner to exercise their discretion under paragraph 35-55(1)(c) of the ITAA 1997 in the 20XX-XX to 20XX-XX financial years. Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where: i. the business activity has started to be carried on but because of its nature, it has not satisfied or will not produce, assessable income greater than the deduction attributable to it, and ii. there is an objective expectation that within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year. Where a taxpayer chooses to carry on the business activity 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. The Commissioner's approach to exercising the discretion under section 35-55 of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion (TR 2007/6). TR 2007/6 states that the lead time discretion provided by paragraph 35-55(1)(b) of the ITAA 1997 and paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents 1 of the 4 tests from being met (paragraph 35-55(1)(b) of the ITAA 1997) or a tax profit from being made (paragraph 35-55(1)(c) of the ITAA 1997). For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a tax profit is inherent to the nature of the business and is not peculiar to your situation. It is emphasised that to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, your business activity will produce a tax profit within a commercially viable period. The phrase 'objective expectation' was discussed in the Administrative Appeals Tribunal case of Scott v. Commissioner of Taxation [2006] AATA 542; VS2005/31-33 ( Scott ), where it was remarked: ...in determining a commercially viable period, the test is primarily an objective one based on independent sources. According to the Commissioner, this approach was taken by the Federal Court in Commissioner of Taxation v Eskandari (2004) 134 FCR 569 where Stone J said, at 581-582: In some cases it may be a straight forward exercise to identify the industry in which the business activity takes place. Some industries are well-established and the basis for an ''objective expectation'' can readily be based on a comparison between the tax payer's business and other businesses within that industry, particularly where businesses or business associations within the industry produce material such as annual reports or industry papers... Despite what Stone J said, Mr Scott contended that there were other circumstances which had to be taken into account when determining the commercially viable period expressed in the Olives Australia document. However, according to the Commissioner, this is impermissible because, as the Federal Court held in Eskandari, in most cases only objective material will be considered. It is only where, because of the nature of the industry, there is very little or no objective evidence that recourse may be had to the circumstances of the tax payer. That is not the case in the olive industry, which has been established for centuries. I agree with that submission. 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. In the case of Scott , additional plantings made later were not permitted to be included in the commercially viable period. This was discussed as follows: 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. The sole reliance on objective evidence and the impermissibility of subjective considerations was further emphasised in the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 (the Explanatory Memorandum). At paragraph 2.30 of the Explanatory Memorandum, it is emphasised a taxpayer is required to establish objectively their business is commercial. It is advised objective evidence from independent sources may include evidence from an individual or organisation experienced in the relevant industry. This includes industry or regulatory bodies, tertiary institutions, industry specialists, professional associations, government agencies or other independent entities with a similar successful business activity. Evidence from independent sources may also include evidence from business advisers (such as business plans), financiers and banks. At paragraph 2.35 of the Explanatory Memorandum, it is advised the lead time discretion is not intended to be available where the failure to make a profit or to meet a test is for reasons other than the nature of the business. This includes a consequence of starting out small and needing to build up a client base. This also includes business choices made by an individual (for example, the size and scale of the activity, the hours of operation and/or the level of debt funding) that are not consistent with the ordinary or accepted practice in the industry concerned. The following examples are included as part of the Explanatory Memorandum: 1. Tracey carries on a business of primary production from breeding and selling cattle. Their profit projections indicate that they do not expect to make a tax profit for six years. Independent evidence provided by Tracey indicates the lead time period begins from the commencement of the activity and includes the time taken to raise the females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached a saleable age. On the evidence provided, the period for a typical business activity of breeding and selling cattle to become commercially viable is no greater than three years. Therefore, Tracey will not be able to produce a tax profit within a period that is commercially viable for the industry concerned and the Commissioner will not be able to exercise the discretion to allow the losses. 2. Joe earns in excess of $250,000 and has a substantial rural property which he and his wife visit most weekends. The property has a family residence and sheds and, apart from one area of the property where a few goats are kept, is otherwise developed with nut trees. Joe planted a large number of nut trees on the land in 2007, and has been claiming his losses from this activity, having passed the real property test in prior years. As his income is higher than $250,000, Joe applies to the Commissioner seeking the exercise of the discretion in new paragraph 35-55(1)(c) to allow him to access his losses in 2009-10. In support of his application, Joe provides a letter from the secretary of the Nut Tree Growers' Association that states that yields from that number and type of trees would ordinarily be sufficient to allow Joe to make a profit within about six years. This is the industry norm for growers of that type of nut tree. However, because the soil on the property is not very fertile and the site does not get a lot of sun, Joe accepts that the lead time for his particular nut-growing activity will be nine years not six years. Joe otherwise manages his nut tree orchards in accordance with industry management practices. Having examined the case, the Commissioner concludes that, despite the large number of trees on the property and the fact that the business is being conducted in accordance with industry management practices, the discretion should not be exercised in Joe's favour. This is because the lead time for this activity to become profitable is greater than the industry norm: the failure to make a profit within a commercially viable period is due to factors that are peculiar to Joe's local environment. Despite the fact that these factors are out of Joe's control, and the fact that the activities are otherwise carried on in a commercially viable way, the excessive lead time before making a profit for Joe's activities are caused by the poor soil quality and lack of sunlight. The Commissioner does not exercise the discretion in Joe's favour because there is an excessive lead time before making a profit, when compared to other businesses in the industry. | Detailed Reasoning - Application to your circumstances: You commenced your xx farming business activity in the 20XX-XX financial year. You planted X acres of xx throughout this financial year on the Block, which you have been leasing from your parents. You intend on planning approximately a further XX acres of xx in the 20XX-XX financial year, after purchasing the whole farm from your parents. The whole farm has previously been used for xx cattle farming and needs to be converted to be appropriate for xx farming. During the period of the 20XX-XX to 20XX-XX financial years, you expect your business to make losses. It is accepted that it is within the nature of your business activity to require a lead time before the activity produces a tax profit. However, there must also be an objective expectation this lead time is within a period which is commercially viable for your industry. Subjective considerations, such as staggering the planting of the xx and the requirement to convert a xx cattle farm into a xx farm, are not an inherent characteristic. When you commenced your business activity, you were only able to plant X acres of xx. This is because you were only leasing part of the farm and were yet to purchase the whole farm. You also required the initial X acres of xx to be harvested so it could be used to plant the remaining acreage of xx. Your decision to commence your business before purchasing the whole farm and to use the initial xx to plant xx on the remaining farmland would have impacted on the length of time required before your business will make a profit. These are individual circumstances affecting your activity rather than an inherent characteristic of the activity. You commenced your business on farmland which at the time, was suitable for xx cattle farming. It is acknowledged significant financial outgoings will be required to convert the farmland to be suitable for xx farming. You are also in the process of purchasing the whole farm from your parents and will be taking out a loan to fund this purchase. It is acknowledged you will also be required to satisfy debt obligations. It is also acknowledged that to satisfy these debt obligations, you will be required to continue to work your separate occupation. Out of precaution, you have made a business choice to start small and expand. You have also made business choices impacting your business' levels of debt funding, hours of operation and location. Although you have grounds for making such business choices, these business choices are not inherent features of your xx farming business. They are peculiar to yourself. You are seeking the Commissioner's discretion to allow the losses from your business activity from the 20XX-XX to 20XX-XX financial year. This period concludes in the seventh year of operation. It is considered the fact your activity will require X years to become profitable is not simply a result of the nature of your activity. Rather your individual circumstances have impacted on the length of time required before a tax profit is made. You have provided independent evidence in the form of an information document. In the information document, it is stated 'When the crop is harvested (normally 12 to 18 months after planting), the next or first ratoon crop is produced from the buds remaining on the underground portions of the stalk'. You have also indicated in your business plan that the xx production cycle commences in Xx of one year and concludes in Xx of the next year. You have therefore indicated the xx production cycle lasts between 1 and 2 years. It would be expected that for a business to be commercial, it would be making a tax profit when it reaches or shortly after it reaches full production. You have told us you will not be making a tax profit until a sufficient time after your first xx production cycle. There is no evidence to show that the commercially viable period to make a tax profit for your industry is this substantial. That is, it has not been shown that your business activity will make a tax profit within a period that is commercially viable for your industry. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a profit. Therefore, the Commissioner will not exercise their discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the years in question.