Edited version of private ruling

Authorisation Number: 1011527743910

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Ruling

Subject: Non-commercial losses - Commissioner's discretion - lead time

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 primary production activity in your calculation of taxable income for the years ending 30 June 2010 to 2011?

Answer

No.

This ruling applies for the following period

Years ending 30 June 2010 and 2011

Relevant facts

You have provided details of the location and scale of operation of your primary production activity. You purchased the activity as a going concern. The activity had been neglected by the previous owners and you spent several years improving the activity. Subsequently you made the decision to commence operating the activity as a business.

Independent evidence you provided from various sources indicates the commercially viable period for the industry concerned.

You have provided income and expenditure details indicating that your activity will produce assessable income greater than the deductions attributable to it in a future income year.

You do not meet the income requirement.

Your primary production activity was adversely affected by circumstances prior to the years for which you have requested the discretion.

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 the calculation of taxable income. 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.

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 reads:

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

Note:

Paragraphs (b) and (c) are 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 example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

Your primary production activity has a lead time between the commencement and production of income as required by the Note to paragraph 35-55(1)(c) of the ITAA 1997. Therefore the Commissioner will consider whether the discretion should be exercised to allow you to claim losses from your activity.

In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 as your income for the purposes of paragraph 35-55(1)(c) of the ITAA 1997 is more than $250,000. Your primary production activity has not produced income greater than deductions attributable to it yet. Therefore you cannot claim the losses from your primary production activity unless the Commissioner exercises his discretion.

In order to exercise the discretion, the Commissioner must be satisfied that 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 period that is commercially viable for the industry.

The independent evidence you provided from various sources shows that the industry will take a certain number of years before started production and will reach maximum production after several years afterwards.

Although you made the decision to commence your primary production activity in a later year, you bought the activity before that as a going concern.

The lead time for your activity starts from the time the primary production activity was originally started and that was before prior to the year you purchased it.

As demonstrated by evidence from independent sources, in the relevant industry the commercially viable period would be a certain number of years.

As explained in paragraph 21 of Taxation Ruling TR 2007/6, the period that is commercially viable for the industry concerned is the period in which it is expected that any business activity of that type which is carried on in a commercially viable manner, would be expected to satisfy one of the tests or produce a tax profit.

Your primary production activity will not produce income greater than deductions attributable to it within the commercially viable period for the industry. Therefore the Commissioner will not exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997 in relation to your primary production activity for the years ending 30 June 2010 and 2011.

You have indicated that your activity was adversely affected by circumstances beyond your control in a year prior to the years for which you have requested the discretion. The Commissioner accepts such circumstances can be beyond your control and can potentially be 'special circumstances' as these terms are used in paragraph 35-55(1)(a) of the ITAA 1997.

As previously discussed, the commercially viable period for your activity has lapsed prior to the particular year. However, your activity did not satisfy a test in Division 35 of the ITAA 1997 for those years although the adverse circumstances had no effect on your activity.

Paragraph 50 of Taxation Ruling TR 2007/6 states that in the situation where a business activity would have failed to satisfy a test even if the special circumstances had not occurred, it is unlikely that the Commissioner would consider it to be unreasonable for the loss deferral rule to apply and therefore the Commissioner would be unlikely to exercise the discretion.

As discussed above, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in respect of your farming activity for the years ending 30 June 2010 and 2011.

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