Private ruling: Non-commercial losses and the Commissioner's discretion
Published: July 2011
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2008

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your livestock activity in the calculation of your taxable income for the 2010-11 to 2013-14 financial years? | A1: No.


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 - Paragraph 35-55(1)(a) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c)

Reasons for decision: Summary: 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 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 income 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 · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied. As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542 ( Scott's Case ) , the Administrative Appeals Tribunal (AAT) upheld the Commissioner's decision in not applying the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years. The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis. In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the AAT member expressed the following view: It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities. In your case, you purchased a livestock farm in 2009 and stocked it with some livestock a few months later and intend increasing the herd to full numbers over a number of years by purchasing additional breeders and also through natural increase. You have stated that the commercially viable period for your industry is five years which means that you should have expected to make a profit in the 2013-14 financial years. However, you have not produced any independent evidence to support this claim. The commercially viable period for the livestock breeding industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached saleable age. The commercially viable period for livestock breeding is generally two to three years. Based on this, your livestock breeding activities should become commercially viable in the 2011-12 financial year. It is acknowledged that you have undertaken infrastructure work including fencing, machinery and stock yards. However, this is a circumstance peculiar to your particular business activity and is not inherent to the nature of the industry. Whether by using the generally accepted period or your estimate, your activity will not produce a tax profit within a commercially viable period. It is considered that your case is similar to Scott's Case and the reason that a profit is not produced within the commercially viable period is because you did not fully stock the property but rather, you staggered your stocking with purchases in successive years and with natural increases. Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. 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. Therefore, you must defer the loss to a future year where the loss can be claimed against a profit from your business activity. However, should you satisfy the income requirement in any year, the discretion is not necessary and you can claim your losses in that year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You commenced a livestock farming activity in 2009. | You stocked with approximately 60 head of livestock. You stocked at this amount to allow you to assess the carrying capacity of the property, which included seeking professional advice from an agronomist. | The carrying capacity of the property is approximately 200 and you intend building to this number by purchasing some livestock but mainly by natural increase. | You have invested in infrastructure including fencing, machinery and stock yards. | You have provided projections which show that the activity will produce a tax profit in the 2014-15 financial year. | You satisfy the assessable income, real property and other assets tests. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2010-11 financial year and may also potentially be more than $250,000 in the 2011-12 to 2013-14 financial years.