Private ruling: Non-commercial losses - Commissioner's discretion
Published: February 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

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 activities in your calculation of taxable income for the 2014-15 to 2017-18 financial years? | A1: Yes

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • Your private ruling application. You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a primary production business as a sole trader. The business is a mixed business with two primary production activities. You have provided independent evidence that attests to commercially viable periods for each of your primary production activities. You intend to make a tax profit in the 2018-19 financial year which is within the commercially viable period for each activity.

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)(c)

Reasons for decision: Summary: Your primary production activities are considered to be two separate business activities and the non-commercial loss provisions are applied separately to each activity. There is an objective expectation that within a period that is commercially viable for each industry, your activities will produce assessable income greater than the expenses attributed to them. Therefore, the Commissioner will exercise the discretion available for the 2014-15 to 2016-17 financial years. | Detailed Reasoning - Detailed reasoning: 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 is above $250,000. In order to exercise the discretion, the Commissioner must be 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 (paragraph 35-55(1)(c) of the ITAA 1997). The objective expectation does not have to be held by, or attributed to, a particular person. The Commissioner need only be satisfied that, based on the available supporting material, an objective expectation exists. 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. It is accepted that it is in the nature of your business activities to require a lead time before they produce a tax profit. However, there must also be an objective expectation their lead times are within a period which is commercially viable for these industries. For the purposes of addressing this point, subjective considerations, such as the condition of property at purchase, location, climate or soil conditions or the level of debt funding are not relevant. Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately. The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each of activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities. In your case, your activities are conducted on the same property. The assets used in each activity would, for the most part, be the same; however, there may be some equipment that could only be utilised in one of the activities. The goods produced in each activity are vastly different and service vastly different markets. The activities are not interdependent and any commercial links would be incidental. Based on the facts and the overall impression, your activities are considered to be two separate business activities and Division 35 of the ITAA 1997 will be applied to each business activity separately. Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, these activities will produce assessable income greater than the expenses attributed to them. 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 activities for the 2014-15 to 2017-18 financial years.