Non-commercial business losses rules: Division 35, ITAA 1997
Commerciality of the product
We do not consider the commerciality of your proposals from an investment perspective. In every product ruling we issue, we state that the ruling is not an endorsement of the commerciality of a project.
However, this doesn't mean that we are entirely unconcerned about the commerciality of the product. Whether or not a product 'stacks up' commercially can be a clear indicator of the purposes associated with an outgoing to purchase the product, or whether a business is capable of being carried on.
Individuals, alone or in partnership, participating in arrangements like agribusiness schemes may be affected by Division 35. These provisions concern the deductibility of losses from the carrying on of a business activity.
In many schemes, losses will only be able to be offset against other income if we exercise our discretion to allow those losses in the year incurred.
To exercise our discretion, we need to ensure the arrangement to be ruled on will be profitable within a period that is commercially viable for the industry concerned, and that the income projections are credible and fully supported by appropriate expert independent evidence. We may seek to independently verify certain key assumptions underpinning these projections.
We have seen very wide variations – for example, in the number of plants that are expected to be grown per hectare, expected yields and so on - which on an initial reading appear inexplicable.
There may be valid commercial reasons for such variations. If your application involves such a variation, you should provide an explanation. Copies of, or references to, established third-party material, over and above any expert opinions otherwise provided, will assist us to understand why such variations occur, and how they can be commercially justified.
See also:
Electing growers
Some agribusiness schemes provide participants (growers) with the choice of either:
- harvesting and/or marketing the produce from their identifiable interest in the scheme themselves
- having the scheme manager harvest and/or market the produce on their behalf.
Growers who elect to harvest and/or market their own produce are commonly referred to as 'electing growers'.
We have decided that we will exclude electing growers from the class of persons ruled upon. The reason for this is that we are unable to exercise our discretion under subsection 35-55(1) to allow losses from the activity to be offset against other income. Insufficient information is available at the time of considering the product ruling application to decide that the business activities of electing growers will eventually produce a tax profit.