Edited version of private ruling

Authorisation Number: 1011556403736

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Ruling

Subject: Non-commercial losses - Commissioner's discretion - lead time

This ruling applies for the following period:

1 July 2009 to 30 June 2010

Question

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 relevant income year?

Answer

No.

Relevant facts

You operate a primary production activity. You have provided details of the location, scale and commencement date and future plans of your activity. In a past year you commenced another primary production activity at a different location in order to support your initial activity.

Your activity has not made a profit since the commencement. You have not satisfied the income requirement. Your activity has passed two tests in the year for which you have requested the discretion.

You have provided details of actual and projected production and assessable income for your activity. This information indicates that your activity has not produced a tax profit in the past and will not do so for several future years.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, 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.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-1

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

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

Income Tax Assessment Act 1997 section 35-55

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

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.

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

As seen from the above paragraph, 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).

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.

In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 as your income for the purposes of paragraph 35-55(1)(c) of the ITAA 1997 is more than $250,000. Your primary production activity has not made a tax profit yet. Therefore you cannot claim the losses from your activity unless the Commissioner exercises his discretion.

As explained in the Note to paragraph 35-55(1)(c) of the ITAA 1997, your primary production activity has a lead time between its commencement and the production of any assessable income. Therefore the Commissioner will consider whether the discretion should be exercised to allow you to claim losses from your activity.

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 primary production activity will produce assessable income greater than the deductions attributable to it for that year, within a period that is commercially viable for the industry.

Information you provided shows that your initial primary production activity and the one you commenced later were interdependent and merely components of one primary production activity. You have not commenced a new activity.

You have not provided any independent evidence for the commercially viable period for the industry concerned. However, the nature of your activity is that there is a lead time before production is commenced and assessable income is generated. Your activity has gone past this stage and effectively passed the commercially viable period.

The commencement of your second activity at a later stage does not allow you to recommence the commercially viable period. Even if that activity is a separate activity, which is not accepted, the commercially viable period for that has also elapsed.

Your activity has not produced assessable income greater than the deductions attributable to that year within the commercially viable period for the industry.

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. Accordingly the Commissioner will not exercise his discretion in relation to your primary production activity for the relevant income year.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the relevant income year 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 relevant industry has lapsed.

As you do not expect a taxation profit in the relevant income year, 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 that year. A deferred loss is not disallowed and will be deductible against any taxation profit from your activity, or similar business activity, in future years.

If your 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 a future year, then the whole of the deferred loss will be deductible in that year.

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