Edited version of private ruling

Authorisation Number: 1011568495731

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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 five income years?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2014

The scheme commenced in

1 July 2009

Relevant facts and circumstances

You are carrying on a mixed primary production activity as a sole trader as well as in partnership with another party.

The activity is carried on property owned by related entities. The related entities have purchased the properties in stages.

The business has commenced a number of years ago. As the properties were purchased in a run down state you were required to develop the properties to increase the profitability of the activity.

During the period of improvement, you have encountered unavoidable circumstances.

Your goal is to bring the property to an excellent self sustaining state within the next three to five years.

You have provided letters/reports from independent sources with regards to your activity. In one of the reports it is stated that you have developed a five year business plan and projected to produce a taxable income within the industry accepted lead time of X years.

You have stated that the activity is carried on as a business. The income tax returns lodged for the past years confirm that you have been carrying on the primary production activity for a considerable time.

You have also provided the following documents with regards to the activity:

· A copy of the business plan

· Profit and loss historical summaries and projections

· Projections of the business

· Photos of the activity.

Your primary production activity employs permanent staff, contractors and casual staff.

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 for five income years.

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

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, or

· you satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed (in conjunction with the income requirement), the discretion is exercised, or the exception applies.

In broad terms, the tests require:

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

(b) 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)

(c) 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), or

(d) 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).

In the context of section 35-35 of the ITAA 1997 ((b) above), a 'taxation profit' for the income year in question is where the amount of assessable income from the business activity for that year, is greater than the sum of the deductions attributable to it for that year (apart from the operation of subsection 35-10(2) of the ITAA 1997).

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain tests) in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. However, the discretion can only be granted in particular circumstances as detailed below.

The income requirement in subsection 35-10(2E) of the ITAA 1997 is satisfied if the sum of the following is less than $250,000:

· your taxable income for that year

· your reportable fringe benefits total for that year

· your reportable superannuation contribution for that year

· your total net investment losses for that year.

You have stated that you have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

Your activity will only be potentially subject to these provisions if it is carried on as a business. You have stated that your activity is carried on as a business and this ruling is made on the basis of accepting this claim.

Application of paragraph 35-55(1)(c) of the ITAA 1997

In order to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997, 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.

The related entities have purchased adjoining land in stages and you have gradually increased the farming activities. You have developed the previously unproductive land into productive land to generate income and make profits.

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 the mixed primary production 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 in Division 35 of the ITAA or produce a tax profit.

The time required for your activity to be commercially viable cannot be more than X years.

The independent evidence you have provided suggest that the activity will produce a taxable income within industry accepted lead time of X+ 1 year.

Your primary production activity commenced many years ago.

Therefore, the commercially viable period for the mixed primary production activity has lapsed.

If you were producing a slightly different product previously to what you are producing now, still the commercially viable period has lapsed as you have only diversified your activity.

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 mixed primary production activity for the current and future income years.

Accordingly, it would be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your business activity for the relevant income years.

You have stated that unavoidable circumstances affected your business activity.

Paragraph 13 of the Taxation Ruling TR 2007/6 reads 'Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35'.

The income tax returns and the income and expense statements you have provided confirm that you have satisfied the assessable income test in section 35-30 of the ITAA 1997 in the past and that you expect to satisfy the test in the future. This indicates that the above stated conditions have not affected your activity in terms of its income.

The unavoidable circumstances have not affected your mixed primary production activity causing it to not satisfy the assessable income test in section 35-30 of the ITAA 1997.

Summary of reasons for decision

The Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the relevant income years because, on the facts provided:

· the Commissioner is not satisfied that it is because of the nature of your mixed primary production activity that it has not produced a taxation profit within the commercially viable period, and

· the commercially viable period for the mixed primary production activity has lapsed.

As you do not expect a taxation profit in 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 mixed primary production activity for that year. 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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