Private ruling: Non commercial losses and the Commissioner's discretion
Published: November 2013
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Can 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 primary production business in the calculation of your taxable income for the 20XX financial year? | A1: No. | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your primary production business in the calculation of your taxable income for the 20YY and 20ZZ financial years? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision: Summary: Commencement of business In order for Division 35 of the ITAA 1997 to apply, a taxpayer must have commenced business. In determining when a business commences, there are three indicators that must be present before it can be said that a business has commenced. These are: • purpose, intention and decision; • acquisition of a business structure; and • commencement of business operations We must examine the above indicators in light of the characterisation of your business activity. In Goodman Fielder Wattie Ltd v. Federal Commissioner of Taxation 29 FCR 376; (1991) 22 ATR 26; 91 ATC 4438, where claims for business deductions prior to November 1982 were at question, Hill J stated: Critical to the resolution of the present controversy, is the characterisation of the business activity itself which is said to have commenced. It was conceded properly by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982... For example, for a primary production activity involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as a trading activity, involving conducting services in return for a fee, the business would generally be considered to have commenced once you begin conducting the services for a fee. The information you provided clearly indicates that your intended business activity was best characterised as a primary production activity. Your intention was to produce X and fruit and vegetables. The indicators set out above are used to determine whether your business activity had commenced during the 20XX income year. In your case, it is considered that there was purpose, intention and decision and you had acquired the business structure. However, we consider that, during the 20XX financial year, your activities of both the X and the fruit and vegetables were preliminary to the carrying on of your intended business and you were still in the course of establishing a business. As stated in the example earlier, for a primary production activity involving the planting and cultivating of trees, the planting of the trees is seen as the commencement of that business. As the provisions of Division 35 of the ITAA 1997 are subject to a business being conducted and it is considered that your business activity has not yet commenced, the discretion at paragraph 35-55(1)(b) can not be exercised for the 2010-11 financial year. Commercially viable period For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: · you satisfy the income requirement and you pass one of the four tests · the exceptions apply · the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year in question where: · it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests · there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that you will pass one of the four tests or make a tax profit within the commercially viable period for your industry. You commenced your primary production business in 20YY financial year. In your projected profit and loss statement, you have shown that your business activity will pass the assessable income test in the 2016-17 financial year. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(b) of the ITAA 1997 in relation to your primary production business for the 20YY and 20ZZ financial years.

Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | · the application for private ruling; | · Revised income and expenditure for the combined activity and individually for two activities. | You purchased a property with the intention of setting up a primary production enterprise. | In the 20XX financial year, you established garden beds for fruit and vegetables which were just test crops and crops to gather seed and not meant for sale in 20XX and 20YY. | In the 20YY financial year, you planted other trees. | The first fruit and vegetables were sold in the 20ZZ financial year. | The commercially viable period for the other trees is five years. | You have provided income and expenditure projections which show that you will pass the assessable income test in the 2016-17 financial year. | Your income from other sources is more than $40,000 but less than $250,000.