Private ruling: Non commercial losses
Published: September 2011
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2006

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 business in your calculation of taxable income for the 2009-10, 2010-11 and 2011-12 financial years? | A1: No

Relevant facts and circumstances: You purchased a property which was growing crops and fruit. The vast majority of trees were planted many years before you purchased the property. You supplied a viability review which was produced by a professional which outlined when he thought the property would be profitable. Since the farm was purchased, you have spent money on wages, contractors, chemicals and other costs to maximise the potential earning capacity of the farm. A drought and other weather conditions have impacted on your ability to maximise the potential earning capacity of the property. A farm manager is employed and another full time employee is engaged to work on the farm. It is your intention to reduce the amount of time you spend at your other income earning activity and spend the balance of the week working on the farm. By doing this you will reduce the wages expense. You have predicted that the farm will be commercially viable in 6 years from the date you purchased the property. Your income for non commercial loss purposes (adjusted taxable income) was above $250,000 in the 2009-10 financial year.

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

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless: · you meet the income requirement and you pass one of the four tests · the exceptions apply · the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business 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 your business activity that there will be a period before a tax profit can be produced · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. You purchased an existing orchard and cropping property. The orchard had been established some years earlier as the vast majority of the trees were planted many years earlier. The orchard was however poorly maintained therefore you spent time and money getting it to a productive state. You have predicted that you will make a taxable profit in 6 years from the time you purchased the property (by 2013). The commercially viable period commenced when the trees were planted. Given that the orchard was well established when the property was purchased and the vast majority of the trees were planted many years before you purchased the orchard, a period which would have been allowed as lead time had already been used up when the property was purchased. Further lead time will not be granted. It follows that you will not make a taxable profit within the commercially viable period for your industry. Having regard to your full circumstances, it is accepted that it is in the nature of the fruit industry that there will be a period of time before a tax profit will be made, however it is not accepted that you will make a tax profit within the commercially viable period for your industry. Consequently the Commissioner will not exercise his discretion in the 2009-10, 2010-11 and 2011-12 financial years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.