Private ruling: Commissioner's discretion and non-commercial losses
Published: March 2015
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

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 primary production business (the activity) in your calculation of taxable income for the 2012-13 financial year? | A1: Yes

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 commenced the activity in 200X. Your goal in the activity was to breed a distinctive type of beast. To do this you began the activity by purchasing a small number of pregnant beasts. Some of the beasts were joined with a stud quality brand A beast and the remaining were joined with a stud quality brand B beast. You began the activity with such a small number, as there were a limited number of stud quality pregnant beasts available for purchased. If maiden beasts were purchased rather than pregnant, it would have increased the timeframe for getting young stock on the ground by approximately one year low pregnancy percentages. You continued to purchase breeding stock in the following financial years and continued the breeding program with the objective of retaining consistent high quality stock. Relatively early in the breeding program you suffered stock losses on two occasions due to floods and subsequent disappearance or illness. This impacted on your breeding program and the lead time necessary for the activity to become profitable. You advised that due to the type of beast you breed in the activity and the subsequent low numbers of breeding stock available when you first started the activity, as well as the beasts losses suffered when the property flooded on two occasions, you estimate that the activity will make a tax profit in the 2017-18 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), and | 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 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. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented you making a tax profit. Further, the loss of breeding stock due to flooding has impacted on your ability to make a tax profit in an earlier year. As such it is accepted that you will make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will exercise his discretion in the 2012-13 financial year.