Edited version of private ruling

Authorisation Number: 1011535376405

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Ruling

Subject: Non Commercial Losses- Commissioner's discretion - lead time.

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 2007-08 to 2012-13 income years?

No.

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2007

Relevant facts and circumstances

You are conducting a primary production activity in partnership.

After a detailed consultation process you decided to commence the activity.

You purchased the necessary stock to commence the activity. The activity was completed in stages.

You have an agreement with a company to purchase your products.

You have provided your actual and estimated income and expenses with regards to the activity in your income tax returns and the private ruling application:

You did not receive the income you expected in the 2009-10 income year.

You have stated that the activity was affected by unavoidable circumstances in the past. You have provided information with regards to those circumstances. You have also stated how the unavoidable circumstances affected your activity.

You have provided a fact sheet relevant to your activity published by a government department. The fact sheet provides the outcome you can expect based on the number of years from commencing the activity. The fact sheet also states that no significant income can be expected until the sixth year. Costs generally exceed income until about the eighth year. Accumulated costs generally exceed accumulated income until at least the eleventh year.

You have provided the following information with the private ruling application:

· evidence of the unavoidable circumstances

· a copy of your business plan

· a copy of the agreement between you and another company to sell your products

· copies of partnership returns.

You have requested the Commissioner to consider the above circumstances and exercise the discretion in paragraph 35-55(1)(b) of the ITAA for the 2007-08, 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13 income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10.

Income Tax Assessment Act 1997 section 35-30.

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

Reasons for decision

You have applied for the Commissioner's discretion to be applied in terms of paragraph 35-55(1)(b) of the ITAA 1997 for the 2007-08 to 2012-13 income years.

You state that your primary production activity is carried on as a business and this ruling is made on the basis of accepting this claim.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where:

(i) the business activity has started to be carried on and for that or those income years

(ii) because of its nature it has not satisfied, or will not satisfy, one of the tests set out in Division 35 of the ITAA 1997, and

(iii) there is an expectation that the business activity of an individual taxpayer will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

The note to the above paragraph states:

Note: 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 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.

It has been accepted based on the information you have supplied that you commenced your primary production activity as early as the 2000 income year. Your activity has not satisfied a test in Division 35 of the ITAA 1997 or received a profit yet. However, it is not accepted that it is because of the nature of your activity that it has not been able to satisfy one of the tests.

The type of feature contemplated by the phrase 'because of its nature', in the context in which it appears, is that referred to in the note quoted above. That is, that there is an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter. This is borne out further by paragraph 1.51 of the Explanatory Memorandum for the New Business Tax System (Integrity Measures) Act 2000, which states:

This arm [paragraph 35-55(1)(b)] of the safeguard discretion will ensure that the loss deferral rule in section 35-10 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. Examples of activities which would fall into this category are forestry, viticulture and certain horticultural activities.

The note and the passage cited above do not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started. Those sorts of constraints on being able to satisfy that test are far removed from the specific one referred to in the note and the Explanatory Memorandum.

The second arm of the discretion in paragraph 35-55(1)(b) of the ITAA 1997 also requires that there be an objective expectation that the activity will satisfy a test or make a tax profit within the commercially viable period for the industry.

As stated in paragraph 21 of the 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. It is not determined having regard to best practice in the industry concerned.

You have stated that the commercially viable period (CVP) is 12-15 years.

The information you have provided published by a government department states that no significant income can be expected until the sixth year and that costs generally exceed income until about the eighth year. Accumulated costs generally exceed accumulated income until at least the eleventh year.

Based on the above information the commercially viable period for the industry cannot be more than nine years.

The Commissioner considers that your contention (CVP of 12-15 years) relates to the time it takes a business activity to make a return on the investment and not the time it takes for the business activity to be commercially viable for the purposes of Division 35 of ITAA 1997.

You have stated that the activity was affected by unavoidable circumstances. The Commissioner accepts that the unavoidable circumstances affected the activity. However, the Commissioner is not satisfied that it was because of the unavoidable circumstances that you were not able to satisfy one of the tests in Division 35 of the ITAA or to generate a profit.

You have commenced the activity in stages. As the activity was commenced on a small scale, you would not have been able to receive in excess of $20,000 to satisfy the assessable income test in section 35-30 of the ITAA 1997 even after 10 years from the commencement.

The calculations indicate that even if the unavoidable circumstances did not occur, you would not have satisfied a test in Division 35 of the ITAA 1997, in your circumstances the assessable income test in section 35-30 or generated a profit within the commercially viable period for the industry.

In view of the above, the Commissioner is not satisfied that it was because of the nature of the activity and the unavoidable circumstances that you were not able to satisfy a test in Division 35 of the ITAA 1997 or generate a profit within the commercially viable period for the industry.

The information provided by you does not support the view that the commercially viable period could be extended beyond nine years.

In conclusion, although your primary production activity is accepted as carrying on a business it is not accepted that the requirements of paragraph 35-55(1)(b) of the ITAA 1997 have been met.

Consequently, the Commissioner will not exercise the discretion in terms of paragraph 35-55(1)(b) of the ITAA 1997 for the 2007-08 to 2012-13 income years.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 because, on the facts provided, the Commissioner is not satisfied that it is because of the nature of your primary production activity and due to the unavoidable circumstances that it has not satisfied or will not satisfy one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 in the 2007-08 to 2012-13 income years.

As no test was satisfied for the 2007-08 to 2012-13 income years, the rule in subsection 35-10(2) will apply to defer to a future income year any loss that arises from your primary production activity for those years. A deferred loss is not disallowed and will be deductible against any taxation profit from your primary production activity, or similar business activity, in future years.

If your primary production activity, or a similar business activity should satisfy an exception or satisfy one of the tests in Division 35 of the ITAA 1997 in any given year, then the whole of the deferred loss will be deductible in that year

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