Edited version of private ruling

Authorisation Number: 1011542602529

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Ruling

Subject: non commercial losses - Commissioner's discretion - lead time - sandalwood trees

1. Are you carrying on a business of growing sandalwood trees?

Yes.

2. Will the Commissioner exercise his discretion to allow you to include any of your losses from your activity of growing sandalwood trees in calculating your taxable income for the 2007-08 to 2010-12 income years, inclusive?

Yes.

This ruling applies for the following periods:

1 July 2007 to 30 June 2008

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2007

Relevant facts and circumstances

You decided to grow sandalwood trees to harvest for nuts to sell to other growers and for wood to be sold for its oils.

To date you have:

· prepared the soil by removing weeds

· planted host trees in the 2007-08 and 2008-09 income years, and

· hand planted sandalwood nuts near each and every third tree.

You have purchased a number of capital items for use in your sandalwood activity.

You have provided a copy of your income and expenses projection for the 2007-08 to 2026-27 income years. The projections show you will meet the assessable income test in the 2012-13 income year.

As of the date of the ruling you have not established a separate bank account or registered a business name for the activity. You will obtain a sandalwood harvesting licence.

You have researched the industry via the internet and contact with suppliers and a potential purchaser for the future sandalwood harvest.

You have provided independent advice in the form of an information sheet from an unrelated entity. The information sheet provides details about growing sandalwood tress and projected returns. It also states that you can expect to harvest sandalwood nuts in five years and the trees in fifteen to twenty years.

You advise your sandalwood growing activity 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 35-40 (other assets test) of the ITAA 1997 until the 2012-13 income year.

Reasons for decision

Question 1

Summary

It is considered you are carrying on a business for tax purposes of growing sandalwood trees.

Detailed reasoning

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as including any profession, trade, employment, vocation or calling, but not occupation as an employee.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts provided.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried out in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Application to your circumstances

Based on the information you have provided, the Commissioner has determined you are carrying on a business of sandalwood growing as:

· the activity has a significant commercial purpose and character in its size and the market for the future product

· you have already commenced your activity by planting host trees and sandalwood nuts

· the activity is carried out in a similar manner to other sandalwood plantations

· you have researched the industry including contacting a potential buyer for your product

· there is potential for a profit to be made from the activity, and

· the activity could not be better described as a hobby, form of recreation or a sporting activity.

Question 2

Summary

The Commissioner has granted his discretion to allow you to claim your losses from your sandalwood growing business for the 2007-08 to 2011-12 income years, inclusive, as it is accepted that it is in the nature of your sandalwood growing activity that there will be a lead time before profit can be expected or one of the tests will be satisfied. This means that any loss for your activity can be taken into account in calculating your taxable income for that year, provided that the arrangement carried out does not differ materially from that described in the ruling.

Detailed reasoning

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as:

· a partner in a partnership that made a loss, or their net partnership distribution after deducting any eligible expenses resulted in a loss, or

· a sole trader (including an individual in a general law partnership) and made a loss.

If you are in business (for tax purposes) you can only offset the loss from a business activity against your income from other sources if you pass one of four tests, an exception applies to you or the Commissioner exercises his discretion in your favour.

The four tests are:

· you have assessable income from the business of at least $20,000

· you have made a profit from the business in at least three out of the last five years

· you use real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business, or

· you actively use other assets worth at least $100,000 (excluding motor vehicles) in the business.

The exception to passing the four tests applies where you carry on a professional arts business or a business of primary production. You may offset your business loss against your other income if your other income for that year is $40,000 or less.

The Commissioner may exercise his discretion to allow you to claim your business loss where the inherent nature of the business activity means that you will make losses for a number of years. For example, primary production activities that have an inherent lead time for the first crop to grow before harvesting.

You have requested the Commissioners discretion in relation to the non-commercial loss provisions for the years ended 30 June 2008 to 30 June 2012 as you will not meet any of the four tests and the exception does not apply to you.

It is accepted that it is in the nature of your sandalwood growing activity that there will be a lead time before a profit can be expected or one of the tests passed.

The independent evidence provided shows that sandalwood trees will not commence producing a commercial harvest of nuts until five years after planting.

You planted host trees during the 2007-08 and 2008-09 income years. Sandalwood nuts were hand planted alongside each and every third tree. You expect the trees to produce sandalwood nuts in five to seven years to be sold to buyers of the nuts. The actual trees will be harvested for their oils in fifteen to twenty years.

The Commissioners discretion is available if you have an objective expectation that the activity will satisfy a test within the commercially viable period for the sandalwood growing industry. Taxation Ruling TR 2007/6 recognises, at paragraph 23, that not all businesses will commence immediately at the start of an income year and allows a tolerance of one year.

You have provided a projected income and expenditure worksheet showing you anticipate assessable income exceeding $20,000 in the 2012-13 income year. Thus, you will meet the assessable test in the 2012-13 and future income years.

It is accepted that six years is a commercially viable period for a commercial sandalwood growing activity. The six years comprise the five years lead time where the sandalwood trees are not producing nuts plus one year tolerance as per TR 2007/6.

The Commissioner will exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the years ended 30 June 2008 to 30 June 2012, inclusive, as it is accepted that it is in the nature of your sandalwood growing activity that there will be a lead time before profit can be expected or one of the tests will be satisfied. This means that any loss for your activity can be taken into account in calculating your taxable income for that year, provided that the arrangement carried out does not differ materially from that described in the ruling.

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