Private ruling: Non-commercial losses - Commissioner's discretion on lead time - Farming
Published: August 2012
Ruling period: For years ended 30 June 2013 to 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 income years from 2012-13 up to and including 2016-17? | A1: Yes, on the condition that the discretion will not be exercised for any income year in question where: · there is a loss from your business activity to which the exception in subsection 35-10(4) of the ITAA 1997 applies · your business activity satisfies, or has already satisfied, one of the tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997, or · your business activity produces assessable income for an income year greater than the deductions attributable to it for that year.


Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 35-55(1)(b). | Income Tax Assessment Act 1997 Subsection 35-10(2). | Income Tax Assessment Act 1997 Subsection 35-10(4). | Income Tax Assessment Act 1997 Section 35-30. | Income Tax Assessment Act 1997 Section 35-35. | Income Tax Assessment Act 1997 Section 35-40. | Income Tax Assessment Act 1997 Section 35-45. | Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: The Commissioner will exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 in relation to your farming business activity for the 2012-13 to 2016-17 income years on the basis that, from the evidence you have supplied: · your farming activity is carried on by you as a business · you actually commenced this business activity when the planting of the trees occurred · you meet the income requirement · it is due to the nature of this activity that it will not satisfy one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997, until at least the 2015-16 income year · there is an objective expectation that within a period that is commercially viable for the farming industry, your activity will satisfy one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997, and · specifically, there is an objective expectation that this activity will satisfy the assessable income test within this period. | Detailed Reasoning - Detailed reasoning: Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years, incorporating changes in the 2010-11 income year. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless: · the exception in subsection 35-10(4) of the ITAA 1997 applies · you satisfy subsection 35-10(2E) the income requirement test, and one of the four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or · if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. | Detailed Reasoning - Exception: Under subsection 35-10(4) of the ITAA 1997, there is an exception to the general rule in subsection 35-10(2) where the loss is from a primary production business activity or a professional arts business activity and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain). On the facts given, the exception in subsection 35-10(4) of the ITAA 1997 has no relevance for the purpose of this ruling. | Detailed Reasoning - Tests: In broad terms, the tests require: · the income requirement is that the taxable income for non-commercial losses purposes is less than $250,000 (section 35-10(2E) of the ITAA 1997) · at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997) · the business activity results in a taxation profit in three of the past five income years (including the current) (section 35-35 of the ITAA 1997) · at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or · at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997). In the context of section 35-35 of the ITAA 1997 (3. above), a 'taxation profit' for the income year in question is where the amount of assessable income from the business activity for that year, is greater that the sum of the deductions attributable to it for that year (apart from the operation of subsection 35-10(2) of the ITAA 1997). | Detailed Reasoning - Are you carrying on a business?: You state that your farming activity is carried on as a business and this ruling is made on the basis of accepting this claim. Application of section 35-55 of the ITAA 1997 (Commissioner's discretion) to this arrangement As your farming activity has commenced, and has been carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997. Information provided with the application for this private ruling indicates that your farming activity has not satisfied any of the tests in Division 35 of the ITAA 1997 and is unlikely to do so until at the earliest the 2015-16 income year. Accordingly, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year, any loss that arises from your farming activity for those years, unless the Commissioner exercises an arm of the discretion under paragraphs 35-55(1)(a) or 35-55(1)(b) of the ITAA 1997. It is accepted that you started carrying on the farming activity as a business. It is accepted that it is in the nature of growing this crop that there will be a lead time before a profit can be expected or one of the tests satisfied. The information (including the income and expenditure projections) you have provided demonstrates there is an objective expectation that your farming activity may satisfy the assessable income test by the 2015-16 income year, 4 years after planting your trees providing there are no set backs. The independent evidence you provided and evidence from Product Rulings suggests that the commercially viable period for the industry is around 5 to 6 years from the time of planting, at which time a commercial harvest is expected. You have projected that you will derive assessable income of more than $20,000 for the 2015-16 income year and potentially make a profit in the 2016-17 income year. These projections are accepted as reasonable based on the independent evidence you provided and the Product Rulings. It is further accepted that meeting a test within five years of planting will be within a commercially viable period for your industry. Therefore, the Commissioner's discretion will be granted for the 2012-13 to 2016-17 income years inclusive. This means that any 'loss' for that activity can be taken into account in calculating your taxable income for those years, provided that the arrangement carried out does not differ materially from that described in this ruling. If there is a material difference you will need to apply for another private ruling on how paragraph 35-55(1)(b) of the ITAA 1997 may apply to those changed circumstances.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The arrangement that is the subject of this ruling is described below. This description incorporates the matters set out in the following documents: | · your 'Application for a private ruling on the Commissioner's discretion for non-commercial business losses' form incorporating: | · your answers to the questions contained in the application form | · a copy of your business plan including a forecast Profit and Loss Statement for the first ten years | · a copy of a Department of Primary Industries booklet. | You conduct a farming activity. You will initially plant several thousand trees on the property. You will operate the business as a sole trader. You will lease the property from an associated entity. | You have requested the Commissioner's discretion from 1 July 2012 to 30 June 2017. You expect a tax profit to be made in the 2017-18 income year. | You have provided independent evidence to show that it will take approximately 5 years before trees will produce a commercial crop. Commercial viability can be materially impacted by adverse growing conditions in the short term. The period requested for the Commissioner's discretion reflects that the activity may be affected by such things. The income projections you have provided indicate that your farming activity may pass the assessable income test in the 2015-16 income year, under ideal conditions. | Product Rulings have issued for the same type of crop you are growing that give a discretion for a 6 year period. | You have provided a copy of your business plan showing your research, planning, property selection, irrigation and crop management process. Your business plan includes a forecast profit and loss statement for 10 years, showing a potential profit in the 2016-17 income year. | Your taxable income for non-commercial losses purposes from other sources is less than $250,000.