Disclaimer
This edited version will be removed from the Database after 30 September 2025. If you believe the issues detailed in this edited version warrant retention in an alternative form, email publicguidance@ato.gov.au

This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011579584492

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.

1. 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 in Year 1?

No.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for Years 2 to 9 inclusive?

Yes.

3. Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for Year 10 and beyond?

No.

This ruling applies for

1 July 200X to 30 June 201X

The scheme commenced on

1 July 200X

Relevant facts and circumstances

You are conducting a primary production activity as a sole trader.

The activity was developed in two stages. The first stage commenced in the 2008-09 income year. The second stage will commence in the 2011-12 income year.

You expect to employ casual labour when required.

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

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

You state your primary production activity commenced in Year 1 and is carried on as a business. However it has not satisfied and will not satisfy any of the tests set out in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) of the ITAA 1997 for the2007-08 to 2016-17 income years.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for the Year 1 and subsequent years.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 35-10.

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.

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 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 may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au 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:

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. Information provided with the application for this private ruling indicates that your activity is not able to satisfy one of the tests or produce a taxation profit, and is unlikely to do so until Year 10. Therefore 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 primary production activity for the intervening income years, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where the income requirement in subsection 35-10(2E) of the ITAA 1997 is satisfied, and

Information provided in your past tax returns shows that you have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

When did your business activity commence?

In determining when a business commences there are three indicators that must be present before it can be said that a business has commenced. They are:

You state that your primary production activity commenced in Year 1. However, you did not commence the business operations until Year 2.

The activities carried out prior to the commencement of the activity are considered to be preparatory activities.

Therefore, the Commissioner is not satisfied that your primary production activity commenced in Year 1. The Commissioner is of the view that the activity commenced in the following income year.

Application of paragraph 35-55(1)(b) of the ITAA 1997 for Year 1

As discussed above, your primary production activity commenced in Year 2.

As no primary production activity was carried on in Year 1, Division 35 of the ITAA 1997 will not apply to your activity.

Any expenses prior to Year 2 are considered to be preparatory expenses, incurred prior to commencement of the activity and therefore, are not deductible under section 8-1 of the ITAA 1997 or any other legislative provision.

Application of paragraph 35-55(1)(b) of the ITAA 1997 for Years 2 to 9

Information you have provided shows that you passed the preliminary stages in Year 2.

It is in the nature of the primary production activity that there will be a lead time before a profit can be expected or one of the tests will be passed.

You have provided independent evidence to suggest that the commercially viable period for the industry would be X years from the commencement.

The information provided by you demonstrates that your activity will satisfy the assessable income test in section 35-30 of the ITAA 1997 and generate a profit in Year 10.

Therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA for Years 2 to 9.

As the Commissioner's discretion has been exercised, the rule in subsection 35-10(2) of the ITAA 1997 will not apply to your business activity for those income years. 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) would apply to those changed circumstances.

Application of paragraph 35-55(1)(b) of the ITAA 1997 for Year 10 and beyond

The information you provided state that you expect to satisfy the assessable income test in section 35-30 of the ITAA 1997 in Year 10 and beyond. You also expect to receive profits in those years.

As your primary production activity is expected to satisfy a test in Division 35 of the ITAA 1997 and generate profits in those income years, the Commissioner is precluded from exercising the discretion for those income years.

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).