Private ruling: Commissioner's discretion
Published: November 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2011

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 business in your calculation of taxable income for the 2011-12 to 2013-14 financial years? | A1: No.

Relevant facts and circumstances: You commenced your livestock breeding activities in 200X. The total number of stock held in the 2012-13 financial year was less than 10. You had previously projected a profit of over $140,000 in the 2011-12 financial year. You have stated that the overall market for your product has declined over recent years by up to 40%. Your previously projected sales for the 2011-12 financial year were over $500,000. Your actual sales were less than $50,000. Your previously projected sales for the 2012-13 financial year were over $600,000. Your actual sales were less than $40,000. Your expenses in each of these years were in excess of $200,000. You now project your activities will produce a profit in the 2013-14 financial year with sales income projected to be $400,000. You have provided some independent evidence which suggests the commercially viable period for your industry/business can be up to eight years. Your income for non-commercial loss purposes in the 2011-12 and 2012-13 financial years was above $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision: Summary: 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 was above $250,000 in the 2011-12 and 2012-13 financial years. The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is 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. 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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base. You have provided some independent evidence which suggests the commercially viable period for your industry/business can be up to eight years. You have provided some projections to suggest your activities will be profitable within this period. However, your actual sales to date show that previous projections provided have been unrealistic and, therefore, it is doubtful that your current projections are unachievable. Taking into consideration the information you have provided, the Commissioner is not satisfied that there is an objective expectation that within a period that is commercially viable for the industry, your activities will produce assessable income greater than the expenses attributed to it. The reason your activities have made, and will continue to make, a loss is due to the small scale of the activity and unachievable sales as a result of a general decline in the market. This is in part peculiar to your situation and is not inherent to the nature of the business. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2011-12 and 2012-13 financial years.