Edited version of private ruling

Authorisation Number: 1011528210729

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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 2009-10 to 2010-11 income years?

Answer No

This ruling applies for the following periods:

2009-10 income year

2010-11 income year

The scheme commences on:

6 March 1998.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

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

Your Private Ruling application dated 29 June 2010.

You are carrying on a business of primary production which commenced several years ago.

Your income for non commercial loss purposes for the most recent income year was more than $250,000.

The information provided in the private ruling application form confirms that you will satisfy the assessable income test in the 2009-10 income year, profit test in 2010-11 income year, real property test 2009-10 and other assets test 2009-10.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-1.

Income Tax Assessment Act 1997 paragraph 35-55(1)(c).

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 meet the income requirement as your income for non commercial loss purposes is above $250,000.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a profit is inherent to the nature of the business and is not peculiar to your situation.

The note to paragraphs (b) and (c) of subsection 35-55(1) of the ITAA 1997 does not support the view that the discretion should be exercised for any start-up activity that is unable to produce a profit because of the small scale on which it was started, or because a client base is being built up but rather for those business activities that have a lead time between the commencement of the activity and the production of assessable income.

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).

Your business activity is capable of producing assessable income soon after its commencement. Your business activity does not have any innate or inherent feature about it that would mean it is not able to produce income in the year of commencement.

Based on the information available in the ATO, the Commissioner accepts that the commercially viable period for the cattle grazing activity, which is your predominant activity, is one year.

Your primary production activity commenced several years ago. Based on the information provided, your business activity is capable of generating income soon after its commencement. However, the actual primary production income and expenses declared in the income tax return for the 2008-09 income year and the projections in the private ruling application confirms that you will be generating a profit in the 2010-11 income year, X years after the commencement.

As stated above, the commercially viable period is determined on an industry basis and not by commercial decisions and liabilities an individual business operator may make in regard to costs, financing, funding, cost efficiency, levels of debt, rates, depreciation, interest etc.

Based on the information provided the Commissioner is satisfied that the commercially viable period for your activity has lapsed.

Therefore the Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 and 2010-11 income years.

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