Private ruling: non-commercial losses
Published: December 2011
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

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 primary production business activity in your calculation of taxable income for the 2009-10 financial year? | A1: 

Relevant facts and circumstances: You do not satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business which commenced over 10 years ago. The primary production business undertaken is primarily devoted towards cattle farming. You have yet to make a tax profit. You submit that you intend to make a profit but have been constrained mainly by interest costs on borrowings. You have sought independent advice in regards to farming methods and best practice in order to establish the property correctly. You have incurred expenses on repairs and improvements due to overstocking for several years. You believe that the business is now structured to be commercially viable and you expect to make a tax profit in the 2011-12 financial year.

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)(a)

Reasons for decision: Summary: For the 2009-10 and later financial years 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 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 in the 2009-10 financial year. Paragraph 35-55(1)(c) of the ITAA 1997 states the Commissioner may decide that the loss deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity has started to be carried on and: o because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and o there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year. The discretion is not intended to be available in cases where the failure to make a profit is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - such as the hours of operation, location, climate or soil conditions, or the level of debt funding. You have not provided objective evidence of the commercially viable period to make a tax profit for the beef cattle industry. If you do not provide the commercially viable period for your industry the Commissioner is not able to conclude that your activity will achieve a tax profit is within a period that is commercially viable for your industry. The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

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