Edited version of private ruling

Authorisation Number: 1011494389028

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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question:

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 farming activities in your calculation of taxable income for the 2009-10 and 2010-11 income years?

Answer: No

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You commenced farming in the relevant year with a breeding herd of approximately X livestock.

A few years later, you purchased properties, and increased the herd to around Y.

At some point you became aware that your farming enterprise needed more flexibility to ensure the maximum value is obtained from the sale of your stock and make you less prone to the effects of seasonal price fluctuations.

More recently, you have purchased a number of properties which has allowed you to increase your breeding herd to more than Z.

Significant improvements have been made to the properties including laser grading, installation of a spray irrigation system, fencing and yards.

To further diversify the enterprise, you will devote a small portion of your properties to another activity.

Your income for non commercial loss purposes for the income years 2009-10 and 2010-11 will be more than $250,000.

You believe your business activity will become commercially viable in the 2011-12 income year.

Reasons for decision

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 is above $250,000.

In order to exercise the discretion, the Commissioner must be 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 (paragraph 35-55(1)(c) of the ITAA 1997).

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.

You commenced your farming business in the relevant year. Over the years you have restructured your business and increased your herd and purchased new properties on which to raise them, but your business activity has essentially remained the same.

You have not provided any evidence from an independent source to establish the commercially viable period for your industry/business. However, the commercially viable period for your industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached saleable age.

In your projected income and expenditure statement you have projected that your business activity will not produce income greater than deductions attributable to it until 2011-12. This is more than 25 years after your business began which is outside the commercially viable period for your industry/business. The reason your business activity is currently producing a loss is due to the restructuring and continued expansion of your business 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.

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