Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 6 December 2016
Published: May 2017
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

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 (the activity) in the calculation of your taxable income for the 20WW-XX to 20YY-ZZ financial years? | 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 commenced the activity in 20XX. Your primary aim is to produce a highly rated, laboratory tested, and pharmaceutical graded product (product A). Your secondary aim will be to produce and sell product A infused with other flavours. Additionally you aim to manufacture and sell other products (product B) from the by-product of the product A manufacturing process. You planted X product A trees in 20XX and are waiting on the delivery of another Y trees from your supplier. You have also ordered a number of other product B trees which are expected to be ready to plant in early 20YY. After planting has been completed, you will construct other manufacturing infrastructure. The initial supply of X plants were X weeks old since seed germination, and on average Y cm high. Based on independent sources and the assumption of attaining ideal growing conditions, each tree will take XYZ months to attain sufficient growth to produce product A. Once product A production commences in the 20ZZ-AA financial year, you expect to make assessable income of at least $20 000 from harvesting, processing and sale of product A products. Further you project the activity will make a profit during that 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)(b).

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: n you satisfy the income requirement and you pass one of the four tests, or n the exceptions apply, or n the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year in question where: n 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, or n 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. 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. Therefore the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 has been granted for the 20WW-XX to 20YY-ZZ financial years.