Private ruling: Non-commercial losses - Commissioner's discretion - lead time
Date of advice: 4 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 1997

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2012/13 to 2014/15 financial years? | A1: No


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)(c)

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 (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the financial 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 (produce assessable income for an income year greater than the deductions attributable to it for that year) • there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. This discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to make a profit in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. The note above does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or because a client base is being built up. Based on the general evidence available, the Commissioner is not satisfied that 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 CVP has expired sometime well before the 2012-13 to 2014-15 income years for which you are requesting the discretion and a profit has never been produced for this activity. Therefore, the Commissioner will not 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 vineyard/winery business activity for the 2012-13 to 2014-15 income years.

Relevant facts: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | The business has been in operation for a period in excess of 15 years. | The business has not produced a tax profit in any year since its commencement. | You have provided a copy of your business plan which was recently updated. | There are a number of facets to your business activity. | There is substantial capital invested in the activity and you have completed activities in a regular manner. | You have applied for the non-commercial losses, Commissioner's discretion on the basis of lead time.