Private ruling: Non-commercial losses - Commissioner's discretion
Published: March 2013
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2007

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 activity in your calculation of taxable income for the relevant financial year? | A1: No.

Relevant facts and circumstances: Your primary production activity commenced in the 2XXX financial year. You commenced improving the property and you also acquired livestock which formed the basis of your herd. You estimate the full trading potential of the activity, from the commencement of the herd nucleus, to be approximately five to seven years. Your original plan was to have reached a commercially viable production in the relevant financial year. To date profits have not emerged and you are revisiting each option open to you. Poor producers and progeny have been disposed of and sales in the first years have been used to improve the herd. Profit has been adversely affected by poor seasonal conditions which have resulted in increased fodder costs. Additional land has been leased to reduce this cost which will also enhance the carrying capacity by allowing increased acreage for livestock production. Water supplies have also been enhanced to improve the carrying capacity of the property. You do not satisfy subsection 35-10(2E) of the ITAA 1997 in the relevant financial year however you expect to satisfy the income requirements in future years. You expect your business activity to make a tax profit in the 2YYY financial year. You have advised that where there is little development needed and have an established herd the activity can be economically viable in two to three years.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements. for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years: (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and (ii) 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 (apart from the operation of subsections 35-10(2) and (2C). The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied 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. Paragraph 35-55(1)(c) of the ITAA 1997 refers to producing a tax profit and doing so in the commercially viable period for the activity from when the activity started. The activity is considered to have commenced when the property was purchased. The ATO regards the time to produce a tax profit for the primary production activity to be two to three years which concurs with your conclusion at question 12, that with a quick start up you could be economically viable in two to three years. You anticipate a tax profit to occur in the 2YYY financial year which is eight years from the commencement of the activity. You have not provided objective evidence of the commercially viable period to make a tax profit for your type of activity. We acknowledge that you have provided a letter that provides evidence that your property was operating as a going concern and therefore the costs associated with the property would be tax deductible. Also comment was made that the first few establishment years were high cost with low returns and that the build up phase has been complete and costs should decrease and income increase. The letter referred to returns in the 2ZZZ season and the expected success in the future. However no information was produced that shows that the period that is commercially viable for the industry is five to ten years. Without this information the Commissioner is not able to conclude that the eight years your activity will take from commencement of the activity to the achievement of 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.