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Edited version of private ruling

Authorisation Number: 1011579971831

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Ruling

Subject: Commissioner's discretion for non-commercial business losses - the nature of your activity

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 business activity in your calculation of taxable income for the 2009-10 to 2011-12 income years?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Relevant facts

The following documents form part of the scheme under consideration:

You are carrying on a primary production business which commenced on a few years ago.

Your income for non commercial loss purposes for the income year ended 30 June 2010 is more than $250,000.

The industry expert's qualifications and experience has been verified.

The independent evidence provided by an industry expert suggests that the commercially viable period for your industry is 8 to 10 years, less for large scale operations with sophisticated irrigation systems to pump out high volumes of water.

You have provided a yield report from a third party operating the same business in the same region which shows information consistent with the industry expert's report.

You also provided the results of a survey of your business activity from different areas that indicate profitable yield occurs in years 8 and 9 of the operation.

Consistent with the above-mentioned information, you believe the commercially viable period for your business operation is 8 to 10 years.

Tax Office records show you produced assessable income from this business activity which was reported on the partnership income tax return for Year 4. This income is related to small sales direct to the consumers.

You explained that these sales are based on the initial small non-commercial yield, which has not yet reached a profitable stage of production. You sold small samples to the general public to generate interest in your product. You project that your activity will achieve 50% effective production Year 8.

Consistent with the majority of small producers, you engage in the same activities in taking the raw product, processing it, and preparing it for sale direct to the general public.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1.

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

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

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 (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 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

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 your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non commercial loss purposes is above $250,000.

Paragraph 35-55(1)(c) of the ITAA 1997 states that In order to exercise the discretion, the Commissioner must be satisfied 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. However, this 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.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

You have produced assessable income from your business activity in Year 4 hence the lead time for your business activity had already expired. However, you have not yet reached the commercially viable period for your business activity, which will commence from Year 8 which is consistent with industry standards for small boutique operations like yours.

Therefore the Commissioner will exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the years ended 30 June 2010, 30 June 2011 and 30 June 2012.

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