Private ruling: Non-commercial losses involving Commissioner's discretion and lead time
Date of advice: 11 October 2016
Published: December 2016
Ruling period: Year ended 30 June 20BB | Year ending 30 June 20CC
Date scheme commenced: 1 July 20AA

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 the losses from your primary production activity in your calculation of your taxable income for the 20AA-BB financial year? | A1: Yes. | Q2: 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 the losses from your primary production activity in your calculation of your taxable income for the 20BB-CC financial year? | A2: No.

Relevant facts and circumstances: You acquired a cattle grazing property (the Property). The Property was previously a crop farm and was valued at $XXXX in 20BB. Your intention with purchasing this Property is to start a primary production business activity. You commenced your business activity in 20AA. In the 20AA-BB financial year you purchased stock that is scheduled for sale in the 20BB-CC financial year. If the seasons are adequate you also intend to grow crops for feed and grain production. As you grow your activity you intend to either lease or acquire further land to increase your production capabilities. You expect to make a tax profit in the 20BB-CC financial year. Your income for non-commercial loss purposes for the 20AA-BB and 20BB-CC financial years was or will be more than $250,000.

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: 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 was above $250,000 in the 20AA-BB financial year and is likely to be greater than $250,000 in the 20BB-CC financial year. The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. In your projected income and expenditure forecasts you anticipate that your business activity will produce income greater than deductions attributable to it in the 20BB-CC financial year or after one year of operation. Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater that the expenses attributed to it. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your primary production activity for the 20AA-BB financial year. However, 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 in relation to your primary production activity for the 20BB-CC financial year. This is because, according to your projected income and expenditure forecasts, you will reach a taxable profit in the 20BB-CC financial year and will have no need for the Commissioner's discretion.