Edited version of private ruling

Authorisation Number: 1011539119775

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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)(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, 2010-11 and 2011-12 income years?

No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2009

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.

You are conducting a primary production enterprise on two adjoining properties.

The first property was purchased in one income year. The second property was purchased in the subsequent income year.

You have stated that the reason for purchasing two properties is to take advantage of the economies of scale which in return will bring the business to be commercially viable within the typical lead time.

The staggered purchase of the properties has assisted you with the cash flow requirements. The sale of trading stock has also assisted the purchase of additional stock for the new enterprise.

At the time of purchasing the second property you have envisaged that you would purchase trading stock soon after purchasing the property. However, due to unavoidable circumstances you were not able to purchase trading stock for some time.

You had a set plan to continue your primary production activity and produce a profit in year five.

You have provided independent evidence from a government department with regards to the commercially viable period for your industry. As per the evidence the commercially viable period for the industry is 30 months.

You have provided the income and expense statements and other information with regards to your activity.

You have stated that you satisfied the assessable income test in section 35-30 of the ITAA 1997 and the real property test in section 35-40 of the ITAA 1997 and that the business is expected to be commercially viable within 30 months.

As you have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997, you have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 paragraph 35-10(2).

Income Tax Assessment Act 1997 paragraph 35-10(3).

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

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.

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 commercially viable period for the industry (paragraph 35-55(1)(c) of the ITAA 1997).

The Commissioner's discretion in subsection 35-55(1) 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.

In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997. Therefore, you need the Commissioner's discretion to claim the losses in those income years.

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

You purchased the first property in the 2006-07 income year to commence the primary production activity. The information you have provided confirms that you generated income from the activity in the 2007-08 and 2008-09 income years and have declared income in your income tax returns for those years respectively.

In the 2008-09 income year you purchased the adjoining property to expand your primary production activity. Although you expected to purchase trading stock few months later, due to unavoidable circumstances you were unable to purchase trading stock till late 2009 and early 2010 years.

As shown in your financial and other statements your primary production activity has been continuing from the date it commenced.

The Note to paragraph 35-55(1)(c) of the ITAA 1997 states that the particular 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. The Commissioner accepts that your activity has a lead time between the commencement and producing any assessable income.

Paragraph 21 of the Taxation Ruling TR 2007/6 states that 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.

The commercially viable period for your industry cannot be more than two to three years.

The independent evidence you have provided states that the commercially viable period is approximately two and a half years (30 months).

You have commenced the primary production activity in Year 1. You have generated income in excess of $20,000 from year two, thereby satisfying the assessable income test in section 35-30 of the ITAA 1997. Accordingly, the commercially viable period for your primary production activity has lapsed.

Since the commencement of the activity you have purchased additional land to increase your activity. It was your decision to develop the primary production activity in stages. This does not change the commencement date of the activity.

If you were carrying on the activity in a different manner, and in a later year you have changed the direction, you have merely diversified your activity. You have not commenced a new activity. The continuation of the activity is evidenced by the statements you have provided.

Where the business would not produce a profit within the commercially viable period, the Commissioner would not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997. Therefore, the discretion has not been exercised for your primary production activity.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) 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 that it has not produced a taxation profit within the commercially viable period; and

· the commercially viable period for the industry has lapsed.

As you do not expect a taxation profit in the the relevant income years, 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 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 similar activity should satisfy an exception or satisfy the income requirement and 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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