Private ruling: Non-commercial Losses - Commissioner's Discretion: Lead Time
Date of advice: 2 March 2017
Published: August 2017
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in your calculation of taxable income for the 20XX-YY income year? | A1: Yes.

Relevant facts and circumstances: You own X cattle breeding farms in business with your spouse. The farms are located on X properties: Property A and Property B. Property A is a certified Organic cattle breeding farm. Property B is in the conversion stage of becoming an Organic cattle breeding farm. There is an estimated lead time of three years for organically bred cattle to reach an age/size where they can become income producing. Under the Relevant 'Australian Certified Organic Standards 20YY' livestock are required to be grown and bred in a way which conforms to natural processes of growth and development. It is expected that the business will derive a profit in the year ended 30 June 20ZZ due to the planned cattle growth and estimated sales in line with the business plan. You suffered a significant work related accident while employed. You received once off large lump sum payments for your workplace accident in the 20YY income year. Due to the lump sum payments, wages and interest received your income exceeds the $250,000 income requirement. In the 20YY financial year, you had to expand the enterprise to produce a greater level of sustainability to support the future income for you family. Your business is commercially viable and it has, does and will continue to pass the assessable income test and the real property test.

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

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 will 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 due to the payments received from your accident. In order to exercise the discretion, the Commissioner must be satisfied that you are able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. You must also show that 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). Based on the nature of organic cattle farming, it can take three years to develop a breeding herd which can produce income for the business. Under the Relevant 'Australian Certified Organic Standard 20YY', livestock are required to be grown and bred in a way which conforms with natural processes of growth and development. It is expected that the business will produce a profit in the 20ZZ financial year due to cattle growth and estimated sales. Based on your circumstances there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater than the expenses attributed to it. The Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your cattle farming business for the year ended 30 June 20YY.