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Edited version of private ruling
Authorisation Number: 1011567885133
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Ruling
Subject: Non-commercial losses
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 the 2006-07 to 2008-09 income years?
No.
This ruling applies for the following periods:
1 July 2006 to 30 June 2007
1 July 2007 to 30 June 2008
1 July 2008 to 30 June 2009
The scheme commenced on
1 July 2006
Relevant facts
You purchased a farm. The farm had some trees which had been established for several years. You planted more trees shortly after you purchased the property.
Your primary production account showed losses from the 2005-06 income year to the 2007-08 income year.
Reasons for decision
Summary
As the majority of the trees had been established for a substantial period before you acquired the property, the Commissioner is not satisfied that the reason your activity did not meet a test in each of the relevant income years was due to 'lead time'. Consequently, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2006-07 to 2008-09 income years.
Detailed reasoning
Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.
the business activity has started to be carried on and, for that or those income years:
· because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45, 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 either meet one of those tests or 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)).
The note to paragraph 35-55(1)(b) of the ITAA 1997 referred to the paragraph being intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. It provides the example of the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.
Paragraph 17 of Taxation Ruling TR 2007/6 deals with the exercise of the Commissioner's discretion under this subparagraph and the meaning of 'because of its nature':
For the failure to satisfy one of the four tests to be 'because of its nature', the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type (see Federal Commissioner of Taxation v. Eskandari (2004) 134 FCR 569; 2004 ATC 4042; (2004) 54 ATR 695).
Many crop growing activities require a lead time to take into account the time required for newly sewn plants to grow and mature sufficiently to produce a significant yield. However, your case is different in that you purchased a property with trees which had been established for several years. The independent evidence you provided shows that these trees should have been producing a significant yield. Although you planted more trees, the majority of your trees were already established when you acquired the property.
The independent evidence suggests that given the age of the trees when you purchased the property, your activity did not require a lead time. The information you have provided is not sufficient to satisfy the Commissioner that the reason why your activity did not meet one of the tests during the income years in question was due to lead time. Therefore, a discretion will not be exercised.
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