Private ruling: Non-commercial losses - Mixed farming
Date of advice: 31 October 2016
Published: February 2017
Ruling period: Year ended 30 June 20XY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will 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 activity in your calculation of taxable income for the 20XY financial year? | A1: Yes.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business of primary production as well as buying livestock for sale as a mixed farming activity. You commenced business operations in the 20XY financial year when you commenced preparing your land and planting your first crops. Your first crops were planted in 20XY. They will be harvested and sold late 20XY. As such, you will not receive income from the 20XY planting until the 20YY financial year. You also commenced buying livestock in the 20YY financial year for the purpose of selling. You have submitted a profit projection which demonstrates your intention to make at least $X0,000 in assessable income from your mixed farming activity in the 20YY 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)(b)

Reasons for decision: Summary: For the 200X-X0 and later financial 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. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 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 You commenced your mixed farming activities in the 20XY financial year. The Commissioner considers the lead time available for both your cropping activity and your livestock activity would not usually exceed a period of X year and as such; accepts that due to the necessary timing of the planting and harvesting of your crops as well as the time of year in which you can purchase livestock at the right age for your purpose, it was not possible for you to generate any income from your activities in the year in which your business activities commenced. 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. Consequently the Commissioner will exercise his discretion to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 20XY financial year.