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Edited version of private ruling

Authorisation Number: 1011539020326

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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 past and future income years?

Yes, except the last year.

This ruling applies for the following period:

1 July 200X to 30 June 200Y.

Relevant facts

The arrangement that is the subject of this ruling is described below. This description incorporates the matters set out in the following documents:

You operate a primary production activity at a specified location. You also have an opportunity to generate income through a secondary activity related to your main activity.

You have provided details of activities you have carried on in the past in relation to your business activity, description of the final products and also details of the scale of operation. You have also listed the tasks you would carry out in the future in connection with the main activity.

Your income projections show that in a future year your activity will return substantial income sufficient to satisfy assessable income test. This particular year is also included in the years for which the Commissioner's discretion is requested.

The information you provided in your business plan suggests that it will take a number of years before the production will be commenced. You will receive incidental income in a year prior to that year.

You state your primary production activity has not satisfied and will not satisfy any of the tests set out in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) of the ITAA 1997 for past and until a future income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 35-10(2E)

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

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

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the income year ended 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:

In broad terms, the tests require:

As your primary production activity has commenced, and is carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997. Information provided with the application for this private ruling indicates that your activity is not able to satisfy one of the tests or produce a taxation profit, and is unlikely to do so until a future income year. Therefore the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your primary production activity for those years, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where income requirement in subsection 35-10(2E) of the ITAA 1997 is satisfied and the business activity has started to be carried on; and for those income years:

Information you have provided shows that you have gone past the preliminary stages and the activity has started to be carried on. It is in the nature of your primary production activity that there will be a lead time before a profit can be expected or one of the tests will be passed until a future income year.

Information provided in your tax return shows that you have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

In your case you have indicated that the commercially viable period for the relevant industry would be a number of years from the commencement. The information available in this office supports the commercially viable period.

Your activity will return income incidental to the operation of your activity within the commercially viable period. It is accepted that the activity will not have reached the lead time in that income year as the income will be incidental.

Financial projections provided by you show that your activity will return sufficient income to satisfy the assessable income test in section 35-30 of the ITAA 1997 for the last year for which you have requested the discretion. As your primary production activity is expected to satisfy a test in Division 35 of the ITAA 1997 for that income year, the Commissioner is precluded from exercising his discretion for that year.

In the ruling to which these explanations relate the Commissioner has stated that under paragraph 35-55(1)(b) of the ITAA 1997, the rule in subsection 35-10(2) of the ITAA 1997 will not apply to your business activity for the relevant income years. This means that any 'loss' for that activity can be taken into account in calculating your taxable income for those years, provided that the arrangement carried out does not differ materially from that described in the ruling. If there is a material difference you may need to apply for another private ruling on how paragraph 35-55(1)(b) would apply to those changed circumstances.

As discussed above the Commissioner will not exercise his discretion in paragraph 35-55(1)(b) of the ITAA 1997 in respect of your primary production activity for the last income year for which you seek the Commissioner's discretion.

You have indicated that you expect to return incidental income through a subsidiary activity affiliated to your predominant activity. The incidental income is the subject of a different legislation and Division 35 of the ITAA 1997 has no jurisdiction on that activity.

Summary of Reasons for Decision

The Commissioner will exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 in relation to your primary production business activity for the past and future income years except the last year on the basis that, from the evidence you have supplied:

The Commissioner will not exercise his discretion in paragraph 35-55(1)(b) of the ITAA 1997 in respect of your activity for the last income year for which you have requested the discretion as your activity is expected to satisfy a test for that year.


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