Overview
Individuals participating in agribusiness managed investment schemes (MIS) covered by an existing product ruling may be affected by the non-commercial loss rules.
These rules cover MIS business losses and whether they can be offset against other assessable income.
Commissioner's discretion
Product rulings
Generally, if the non-commercial loss rules may affect an individual participant in an agribusiness MIS, the responsible entity for the MIS applies to us for a product ruling. They ask us to exercise our discretion to rule that the non-commercial loss rules will not apply to an individual participant in the MIS for a defined period.
If the discretion has been exercised for the MIS, it is generally because of the nature of the activity. That is, there is a lead time, typical for the industry concerned, between the commencement of the business activity and the production of assessable income.
If the discretion has been exercised for the MIS, individual participants are not required to defer any business losses from the MIS for the income years that are specified in the product ruling. These losses can be offset against other assessable income in the income year the loss is incurred.
Next step:
The responsible entity of the MIS, and not the participant, can apply for a product ruling. The application must include the additional information required to consider the non-commercial loss rules and to determine if we can exercise the discretion under those rules.
The specified period
If a product ruling has been issued for an agribusiness MIS and the discretion has been exercised to rule that the non-commercial loss rules will not apply to an individual participant of that MIS, the ruling will specify the income years the discretion applies to.
Only for the income years specified in the product ruling is an individual participant in the MIS:
- not required to defer any business losses from that MIS, and
- allowed to offset any business losses from that MIS against their other assessable income, in the income year the loss is incurred.
For more information see:
- the published product ruling for your project
- TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion
No product ruling
An individual may have entered into an agribusiness MIS for which there is no product ruling. Accordingly, most participants in such an MIS are prevented from claiming the MIS business losses against other assessable income in the year the business losses are incurred unless they meet the income requirement and the MIS business passes one of the 4 tests in that year.
Instead, participants must defer those losses until either:
- the MIS business makes a profit in a following year, when some or all of the deferred loss can be offset against this profit up to the amount of the profit
- a participant meets the income requirement and the MIS business passes one of the 4 tests in a following year, when deferred losses can be claimed against other income.
The responsible entity may apply on behalf of participants, or potential participants, in their MIS for a product ruling on the application of the non-commercial loss rules to those participants.
If the MIS has already commenced, we will consider issuing a product ruling on the non-commercial losses provisions. However, the MIS must still be fully described in the application for a product ruling, and we will need to be able to conclude that the deductions in question are otherwise allowable.
For more information see:
- Participants in an managed investment scheme may apply for a private ruling or to extend the period covered by a ruling
- Non-commercial losses eligibility – details the income requirements and the 4 tests.
The responsible entity can email ATO-Product-Rulings@ato.gov.au for further information or assistance.
If the discretion can't be exercised
If we can't exercise the discretion, individual participants of an agribusiness MIS that are carrying on a business activity must defer losses from the MIS.
The deferred amount will only be deductible in a subsequent year if the business activity that gave rise to this amount, or one 'of a similar kind', occurs in that subsequent year. If the activity, or one 'of a similar kind', does not occur again, the entitlement to deduct the amount will be lost.
For more information, see:
- Additional losses beyond the period covered
- paragraphs 86 to 88 of TR 2001/14 Income tax: Division 35 - non-commercial business losses for guidance on business activities of a similar kind.
Additional losses beyond the period covered
If there are additional losses from an agribusiness MIS beyond the period for which we have previously ruled, most individual participants must defer losses from that business activity until either:
- the MIS business makes a profit in a following year, when some or all of the deferred loss can be offset against this profit up to the amount of the profit
- a participant meets the income requirement and the MIS business passes one of the 4 tests in a following year, when deferred losses can be claimed against other income.
We will consider exercising the discretion for a further period in one of 3 scenarios:
- The MIS is still within the lead time for producing a tax profit ('the lead time'), and there is an objective expectation that it will be profitable within the period that is commercially viable for the industry concerned. A tax profit refers to the requirement for a business activity to produce assessable income, for an income year, greater than the deductions attributable to it, for that year.
- The MIS is still within the lead time, special circumstances have extended the period before the scheme is expected to be profitable, and there is an objective expectation that it will be profitable within the period that is commercially viable for the industry concerned.
- The MIS is past the lead time and either
- due to special circumstances, the MIS business would have produced a 'tax profit' or,
- for participants that meet the income requirement, the MIS business would have passed one of the 4 tests.
The responsible entity of the MIS may apply on behalf of participants for us to exercise discretion under the non-commercial loss rules for a further period.
For more information see:
- TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion – See paragraphs 12 to 15 for special circumstances and paragraphs 16 to 27 for lead time.
- Participants in an managed investment scheme may apply for a private ruling or to extend the period covered by a ruling
- If the discretion can't be exercised
The responsible entity can email ATO-Product-Rulings@ato.gov.au for further information or assistance.
Participants in a managed investment scheme may apply for a private ruling or to extend the period covered by a ruling
An individual participant in an agribusiness MIS may apply for a private ruling on the operation of the non-commercial loss rules if the responsible entity of the MIS does not intend to apply.
Alternatively, a group of participants in the MIS may apply for a private ruling, as long as all parties agree in writing to be named as co-rulees.
Next step:
As an individual participant in the MIS you can apply for our discretion, or to extend the period the discretion applies, by lodging a completed private ruling application together with the supporting documentation set out in the evidentiary checklist.
Additional information required to rule
To apply for the discretion of the non-commercial loss rules for an agribusiness MIS you need to provide information to support your application. The following are examples of the type of information that should be provided.
Lead time
The following documents can support that (because of the nature of the business activity) there is a lead time before profitability can be expected:
- industry reports
- published industry statistics
- independent expert report on the industry.
Objective expectation
There must be an objective expectation that within a commercially viable period for the industry concerned, the business activity will produce a 'tax profit', or for participants that meet the income requirements, the business will pass one of the 4 tests:
- assessable income test
- profits test
- real property test, or
- other assets test.
The following documents can support an objective expectation:
- independent expert report on the MIS
- MIS business plan
- forecasted cash flows
- actual cash flow
- revised forecasted cash flows
Special circumstances
You can use the following documents to show that special circumstances have affected the business activity so that is has not produced a 'tax profit' or passed one of the 4 tests:
- independent report on the special circumstances
- independent report on the effect of the special circumstances on the MIS
- published industry reports on the effect of the special circumstances
- published climate and weather reports of the special circumstances (where applicable).
An application based on special circumstances must also demonstrate that there is an objective expectation that the business activity will make a 'tax profit' or meet one of the tests within a commercially viable period for the industry concerned.
The responsible entity of the MIS can apply for a product ruling, including the supporting information required to consider the non-commercial loss rules and determine whether we can exercise the discretion under those rules. The entity can email ATO-Product-Rulings@ato.gov.au for further information or assistance.
If you are a participant in an MIS and the responsible entity of the MIS does not intend to apply for the discretion to be exercised, you can apply by lodging a completed private ruling application together with the supporting documentation as set out in the evidentiary checklist and given in the above examples of additional information required to rule.
- Non-commercial losses
- TR 2001/14 Income tax: Division 35 – non-commercial business losses
- the published product ruling for your project.