Edited version of private ruling

Authorisation Number: 1011529065128

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Ruling

Subject: Non commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow any losses from your activity in your calculation of taxable income for the 2005-06 to 2010-11 income tax years?

Answer: No.

This ruling applies for the following period:

1 July 2005 to 30 June 2011

The scheme commenced on: 1 July 2005

Relevant facts:

You have provided the following information with regards to your activity:

You commenced business in the year ended 30 June 2006.

You own a primary production property and grow crops on the property.

You acquired the property with existing trees that had been neglected.

You produced a small amount of assessable income from the activity in the first year.

Lead Time

You have submitted in your application based on the industry that the crops should start to yield small crops in year 3 and increase to near full production by year 7.

Projected profit and loss income and expenditure

In your projected income and expenditure, you have submitted that your activity will be profitable in 2011-12 income year.

Division 35 of the ITAA 1997 Tests

Your activity has not satisfied any tests set out in sections 35-55, of the ITAA 1997.

You are requesting the Commissioner to exercise the discretion in paragraph 35-(55)(1)(b) of the ITAA 1997 to allow the loss on lead time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2)

Income Tax Assessment Act 1997 Subsection 35-10(4)

Income Tax Assessment Act 1997 Section 35-30

Income Tax Assessment Act 1997 Section 35-35

Income Tax Assessment Act 1997 Section 35-40

Income Tax Assessment Act 1997 Section 35-45

Income Tax Assessment Act 1997 Section 35-55(1) (b)

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies

· one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

Commissioner's discretion

Paragraph 35-55(1)(b) of the ITAA 1997 provides that the discretion can be exercised where the taxpayer satisfies subsection 35-10(2E) for the most recent income year ending before the application is made and the business activity has started to be carried on and for the excluded years:

· because of its nature, it has not satisfied one of the four tests; and

· 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 either satisfy one of the tests or make a profit.

However, the note in section 35-55 indicates that the discretion 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.

Further, paragraph 77 of Taxation Ruling (TR) 2007/6 states,

'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons

In your case, you acquired a property with existing trees which had been neglected. You were able to produce assessable income in the first year (albeit a small amount). As you were able to produce some assessable income, it would not be appropriate to exercise the discretion.

Furthermore, the failure to meet any of the tests or make a profit was not caused by an inherent characteristic of your industry, but rather, a failure by the previous owner to maintain the trees.

Owing to the above reasons, the commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2005-06 to 2010-11.

As Division 35 of the ITAA 1997 did not apply to your activity, the losses incurred in the 2005-06 to 2010-11 income years will not be allowed

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