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Edited version of private ruling

Authorisation Number: 1011502499533

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Ruling

Subject: Commissioner's discretion for non-commercial business losses - the nature of your activity

1. 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 activity in your calculation of taxable income for the 2010 to 2013 income years?

Yes.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2014 to 2017 income years?

No.

Relevant facts

The following description of the scheme is based on information provided by you. The following documents form part of the scheme under consideration:

You are carrying on a business of primary production.

Your income for non commercial loss purposes for the income year ended 30 June 2010 is more than $250,000.

Your state your primary production business activity will become commercially viable in seven years.

The independent evidence you provided from an industry expert proposes the likely timeframes for your product to develop and become a commercially viable operation. It is suggested that the first product are found in year four, with a commercial production in year six to seven. You have employed an industry expert as a consultant in the development, production and sales of this product in your business plan.

The independent report shows production levels of a similar company. The first product were found in year two, a yield in year four and a yield in year five.

Your business plan shows the projected costs and revenue (excluding interest expenses and depreciation), which indicates that in year five you expect to produce an income of around $25,000. This indicates the lead time for your business activity will cease in year four.

This business activity will be conducted on the same property as your other primary production business activity. The interest on the loan expense and depreciation expenses for water/irrigation will be apportioned between the two business activities.

The projected costs and revenue in your business plan for this product does not factor in these expenses, therefore it over-estimates the Net Profit. Accordingly, it is expected that this business activity will continue to operate at a loss beyond year four.

This ruling applies for the following period:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

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. The income requirement is set out in subsection 35-10(2E) of the ITAA 1997. 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.

Paragraph 35-55(1)(c) of the ITAA 1997 states that 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. However, this paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income.

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 supplied evidence from an independent source which has established that the commercially viable period for your industry is six to seven years.

You have also indicated that this business activity will produce income of around $25,000 in year five of the operation. Hence, the lead time for your business activity will cease in year four.

Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income for the income years ended 30 June 2010 to 30 June 2013.

The Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997 for the income years ended 30 June 2014 to 30 June 2017.

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