Edited version of private ruling

Authorisation Number: 1011549556188

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

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

Question 1

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 (first stage) in your calculation of taxable income for the relevant income year?

Answer:

No.

Question 2

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 (second stage) in your calculation of taxable income for the subsequent income years?

Answer:

Yes.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2000

Relevant facts and circumstances

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

· your application for private ruling that included your answers to the questions contained in the application form.

· copy of your business plan.

· information regarding your primary production activity.

· fact sheets with regards to the industry.

· letters from third parties regarding your business activity.

You are conducting a primary production activity as a sole trader on several properties. You have experience in this industry.

You purchased the first property as a going concern. When the property was purchased, the previous owner transferred the relevant agreements to you.

The activity is carried out in two stages. You started finalising the first stage during the last income year and now you are in the process of preparing to commence the second stage. You received income from the first stage, however you did not receive a profit from the activity.

You intend to finalise the second stage in X years.

You have provided the cashflow projections for the activity.

The Commissioner has previously issued a private ruling exercising the discretion for the first stage.

The independent evidence you provided state that the commercially viable period for the industry is X years.

You have advised that you have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997. You also advise that you have satisfied at least one of the tests in Division 35 of the ITAA 1997 prior to the particular 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)

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

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, and/or

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

In broad terms, the tests require:

· at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)

· the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

· at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), and/or

· at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

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.

Application of paragraph 35-55(1)(c) of the ITAA 1997 for the current income year

Following the changes to the non-commercial loss legislation from 1 July 2009, 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:

· 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:

· because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; 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 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 that income year.

The information provided for the previous private ruling indicated that you will satisfy one of the tests in Division 35 of the ITAA 1997 and generate a profit in the current income year. Although you satisfied one of the tests in Division 35 of the ITAA 1997 in the subsequent income, you did not generate a profit in the next two years.

The information you have provided state that the commercially viable period for the industry is X years. In terms of the new legislation, you were required to produce assessable income greater than the deductions attributable to it within the commercially viable period. You have satisfied one of the tests in Division 35 of the ITAA 1997, however you have not received income greater than the deductions. As the commercially viable period for the industry has lapsed the Commissioner can not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997. Therefore, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer the loss to a subsequent year.

Application of paragraph 35-55(1)(c) of the ITAA 1997 for subsequent income years

You have stated that you commenced preparing for the second stage in the current income year.

It is in the nature of the industry that there will be a lead time before a profit can be expected from the activity.

The independent evidence you have provided suggest that the commercially viable period for the industry is X years.

The information you have provided, demonstrates that there is an objective expectation that your business activity will produce assessable income greater than the deductions attributable to it in a later income year X years from now.

In view of the above, the Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA for the subsequent income years. Therefore, the rule in subsection 35-10(2) of the ITAA 1997 will not apply to your business activity. 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) or 35-55(1)(c) would apply to those changed circumstances.

This ruling has been based on the legislation as enacted as at the date of this ruling. Future legislative changes could render this ruling invalid. In such circumstances, you may apply for another private ruling

Summary of Reasons for Decision

The discretion will not be exercised for any income year in question where:

· your activity does not constitute the carrying on of a business; or

· there is a loss from your business activity to which the exception in subsection 35-10(4) of the ITAA 1997 applies; or

· you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and your business activity satisfies, or has already satisfied, one of the tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; or

· your business activity produces assessable income for an income year greater than the deductions attributable to it for that year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).