Edited version of private ruling

Authorisation Number: 1011574493229

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Ruling

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

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 an income year?

Answer

No

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commenced in

1 July 2009

Relevant facts and circumstances

You are carrying on a primary production activity. The property was purchased in a run down state. Since you purchased the property you have transformed it into a modern farm.

Your aim is:

· to own and manage a profitable business that will provide an income and support you in retirement.

· to establish a farm with state of the art infrastructure.

Your activity has met three out of the four tests in Division 35 of the ITAA 1997.

You have provided the following documents:

· a copy of the business plan

· the financials (actual and projections)

· independent evidence of the commercially viable period for the industry.

· relevant reports

· information from a government department.

The independent evidence suggests that the commercially viable period is X years. This period includes the time needed to bring a run down farm to a productive farm and generate profits.

You have stated that you have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997. Therefore, you have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the relevant income year.

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).

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, or

· 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.

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.

In your case 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:

· 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)).

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.

You purchased the property a few years ago.

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 discretion in paragraph 35-55(1)(c) also requires that there be an objective expectation that the activity will make a tax profit within the commercially viable period for the industry.

In your industry the commercially viable period cannot be more than a couple of years.

Where an ongoing business activity is purchased by a new owner as a going concern, the 'period that is commercially viable for the industry concerned' as per paragraph 35-55(1)(c)(ii) of the ITAA 1997 is taken from commencement of the activity, not when the activity was purchased by the new owner. Although it is not stated when the activity originally commenced, we believe that your activity is an activity that is capable of producing assessable income quite soon after its commencement, as the sales from your business activity have in fact demonstrated.

Therefore, the commercially viable period for the activity has lapsed.

You have provided independent evidence with regards to the commercially viable period of the industry. This period includes the time needed to improve the farm before receiving profits.

However, the time that is needed to bring the property to a productive state is not included in the commercially viable period for an industry for the purposes of Division 35 of the ITAA 1997. The Commissioner considers that your contention relates to the time it takes a business activity to make a return on the investment and not the time it takes for the business activity to be commercially viable for the purposes of Division 35 of the ITAA 1997.

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 activity for the relevant income year.

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 year.

You have stated that various other difficulties have also affected your 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 and expense statements you have provided confirm that you have satisfied the assessable income test in section 35-30 of the ITAA 1997 from the relevant income year. This indicates that the above stated conditions have not affected your activity in terms of its income.

The difficulties you have encountered have not affected your 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 year because, on the facts provided:

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

· the commercially viable period for the activity 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 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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