Private ruling: Income tax - Tax losses - Non-commercial losses - Commissioner's discretion - lead time
Published: September 2014
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the Commissioner exercise the discretion in paragraphs 35-55(1)(b) or 35-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include any losses from your particular growing activity in your calculation of assessable income for the income year ended 30 June 2012, 30 June 2013, 30 June 2014 and 30 June 2015? | A1: Yes

Relevant facts and circumstances: You lodged a private ruling application and provided the following: • a list of new Growers in the 200X Project and their consents to apply for a Private Ruling; • an Overview of the 200X Project; • a copy of the Product Disclosure Statement and Supplementary Product Disclosure Statement; • a copy of a Product Ruling for the 200X Project; • a copy of the Deed of Assignment; • Project Agreements: • a copy of the Asset Trust Constitution and relevant Supplementary Constitutions; • a copy of the executed Grower Project Constitution and relevant Supplementary Constitutions; • a copy of the executed Allotment Management Agreement and Deed of Variation; and • a copy of the executed Allotment Sublease Agreement and Deed of Variation. • a spreadsheet of projected cashflows for a Grower for the income years ending 30 June 2014 to 30 June 2025; • an orchard report from independent expert dated 20XX from an inspection undertaken in 20YY; and • an orchard report from independent expert dated 20XX. You provided the following additional information: • an explanation of the events and transactions that occurred as a result of the termination of your interest in a 20ZZ Project and the assignment of an interest in the 200X Project; • copies of the Summary of the Orchard Operations, for the income years ending 30 June 2012 to 30 June 2014 for the 200X Project; and • to advise that all the new Growers had one accountant/advisor. You were previously a Grower in the 20ZZ Project which had a Product Ruling. This project ceased operation on 30 June 20ZZ and the Responsible Entity (RE) terminated your interest. • On 1 July 20ZZ you became a new Grower in the 200X Project by: • consenting to transfer your interest from the 20ZZ Project to the 200X Project; • incurring a capital payment; and • by having an interest in the project assigned to you as a new Grower. • The Commissioner has previously provided a Product Ruling for the 200X Project, in respect of participants who entered that project. You cannot rely that because you did not participate in the 200X Project in the way described in that Product Ruling (you did not enter the scheme on or before the specified date). • You executed a Deed of Assignment in respect of the RE's Sublease and the relevant Allotment Management Agreements, to formalise this assignment of your interest in the 200X Project. • Under the Deed of Assignment, the new Grower agrees to perform all of the obligations in the Project Agreements as if they had originally been named as the Grower in the Project Agreements, and the new Grower agrees to be bound by the terms of the Project Deed. • The main features of the 200X Project are that: • The main type of business activity is the tending of an nut orchard for the harvesting and sale of the products; • The size of each Allotment is X hectares and X trees per allotment were to be planted in 200X/200Y; • For the original Growers, the 200X Project commenced in the income year ending 30 June 200X, with a term of 17 years. • Pursuant to the Allotment Sub-Lease Agreement the RE of the Grower Project subleases X hectares of Land ("an Allotment") or multiples thereof, and grants the right to use the Project Assets to each Grower for the purpose of growing, maintaining and harvesting trees. • Pursuant to the Allotment Management Agreement, each Grower will engage the RE to manage their business and to carry out the duties that are usual or necessary for operating an orchard on the Grower's Allotment. • Each Grower will use their Allotment for the purpose of carrying on a business of cultivating and harvesting products and the sale of harvested produce. • The RE harvests, processes and sells the products from all Growers' Allotments on a collective basis. The proceeds of sale of the accumulated products sold are divided pro-rata according to the number of Growers' Allotments contributing products for sale (subject to any adjustment for material difference in the production levels of each Allotment) after deduction of fees and outstanding liabilities owing under the Allotment Management Agreement or the Allotment Sublease Agreement. • In the income years following your assignment, you were obliged to pay further management fees, growing fees, sub lease fees to asset owner, and processing and marketing fees. • The 200X Project was first expected to produce assessable income greater than the deductions attributable to it for the income year ending 30 June 2014. • The revised cashflow projections for a Grower in the 200X Project for the income years 2013-2014 to 2024-25, as provided by the RE indicate that the 200X Project is not expected to produce assessable income greater than the deductions attributable to it until the year ended 30 June 2016. • In your case, the actual assessable income has fallen short of the attributable deductions and your activity has not satisfied any of the objective tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997. Therefore, section 35-10 may apply to defer losses incurred in relation to the 200X Project unless the Commissioner exercises his discretion under subsection 35-55(1) for the income year ended 30 June 2012 to the income year ending 30 June 2015. • In order to offset your losses from the 200X Project against your taxable income, you have applied for a private ruling seeking the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the income years ended 30 June 2012 through 30 June 2015.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 section 35-10 | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 section 35-55 | Income Tax Assessment Act 1997 paragraph 35-55(1)(b) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: Yes, the Commissioner will exercise the discretion under paragraphs 35-55(1)(b) or 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your growing activity in your calculation of assessable income for the income year ended 30 June 2012, 30 June 2013, 30 June 2014 and 30 June 2015. As the Project is not expected to produce assessable income until the income year ending 30 June 2016, the Commissioner accepts that this period is within the lead time for the specific growing industry and that there is an objective expectation that the 200X Project will make a tax profit within a period that is commercially viable for the industry. | Detailed Reasoning - Detailed reasoning: The 200X Project is expected to first produce a profit by the income year ending 30 June 2016. A new Grower who accepted an assignment in the 200X Project on 1 July 20ZZ and carries on a business of nut growing individually (alone or in partnership) and is (or has) expected to incur losses from their participation in the 200X Project for the income years ending 30 June 2012 to 30 June 2015 will be subject to Division 35 of the ITAA 1997. 1 These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) of the ITAA 1997 on 30 June of those specific income years. The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion when exercising the discretion (TR 2007/6). In the income year ending 30 June 2010, an income requirement was introduced to Division 35 of the ITAA 1997. This income requirement will apply to these new Growers in the 200X Project for the income years ending 30 June 2012 to 30 June 2015. Where a new Grower with income for NCL purposes of less than $250,000 (that is, the new Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the Scheme described in this Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that: • it is because of its nature that the business activity of the new Grower will not satisfy one of the four tests in Division 35; and • there is an objective expectation that within a period that is commercially viable for the specific growing industry, the new Grower's business activity will satisfy one of the four tests set out in Division 35 or produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). For the income years ending 30 June 2012 to 30 June 2015, where a new Grower with income for NCL purposes of $250,000 or more (that is, the new Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that: • it is because of its nature that the business activity of the new Grower will not produce assessable income greater than the deductions attributable to it; and • there is an objective expectation that within a period that is commercially viable for the specific growing industry, the new Grower's business activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). A new Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000: • taxable income for that year (ignoring any loss arising from participation in the 200X Project or any other business activity); • total reportable fringe benefits for that year; • reportable superannuation contributions for that year; and • total net investment losses for that year. In accordance with Taxation Ruling TR 2007/6, specifically Example 10 at paragraphs 141-151, it is considered that inherent characteristics have prevented the new Growers from satisfying a test, or producing assessable income greater than the deductions attributable to it, in the income years ending 30 June 2012 to 30 June 2015. It is considered that this period is within the lead time for the nut growing industry. As such, the business activity meets the requirements of subparagraph 35-55(1)(b)(i) or subparagraph 35-55(1)(c)(i) of the ITAA 1997. To satisfy the requirements of subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii) of the ITAA 1997 there needs to be an objective expectation that the business activity will satisfy a test or make a tax profit within a period that is commercially viable for the industry concerned. The information from the independent expert reports and the projected cash flows provides evidence to supports a conclusion that there is an objective expectation that the 200X Project is commercially viable. The business activity is expected to have its first profitable year in the income year ending 30 June 2016 and therefore make a tax profit in that year, which will occur within the period referred to in subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii) of the ITAA 1997. In this case the Commissioner's discretion would be exercised for the income years ending 30 June 2012 to 30 June 2015 as it would be unreasonable to apply the loss deferral rule. 1 Division 35 does not apply to Growers who do not carry on a business or who carry on a business other than as individuals (alone or in partnership).

Issue: Deferral of losses from non-commercial business activities | Question: Will the Commissioner exercise the discretion under paragraphs 35-55(1)(b) or 35-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include any losses from your product growing activity in your calculation of assessable income for the income year ended 30 June 2012, 30 June 2013, 30 June 2014 and 30 June 2015?