Private ruling: Non-commercial losses
Published: March 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 ( ITAA 1997) to you to include any losses from your business activity in the calculation of taxable income for the 2012-13 financial year? | A1: Yes.

Relevant facts and circumstances: In the 2011-12 financial year you commenced your primary production business activity. You do not meet the income requirement for non-commercial loss purposes. When you purchased the property it had been neglected and had very little soil improvement conducted previously. In the 2011-12 financial year you undertook soil enriching activities resulting in a loss for that year. In the 2012-13 financial year the first commercial crop was planted and a profit was made. However this income was not paid until the 2013-14 financial year. You expect to be paid in the 2013-14 financial year for sales made in that financial year and also to make a profit. You expect a profit in the subsequent financial years where payment for sales is anticipated in the year of harvest.

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 paragraph 35-55(1)(c) | Income Tax Assessment Act 1997 subsection 35-10(2E) Detailed reasoning | For the 2009-10 and later financial years, Division 35 of the ITAA 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 and do not come under any of the exceptions. 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. | In your circumstances, you produced a profitable crop in the relevant financial year. The payment of this profitable crop was not made to you until the following financial year. This resulted in you posting a loss in the relevant financial year. | Having regard to your full circumstances, it is accepted that because payment of a crop is sometimes made in the financial year following harvest it is in the nature of the business activity that has prevented you making a tax profit in the relevant financial year. | Although you have not provided an independent source stating what the commercially viable period is for cropping it is generally accepted that a profit can be expected within the first or second year of commencing a cropping activity. | Consequently the Commissioner will exercise his discretion in the relevant financial year.