Edited version of private ruling

Authorisation Number: 1011580003726

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Ruling

Subject: Non Commercial Losses - Commissioner's discretion

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 activity in your calculation of taxable income for the 2009-10 to 2013-14 income years?

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced in:

1 July 2001

Relevant facts and circumstances

The following description of the scheme is based on information provided by you.

The following documents form part of the scheme under consideration:

· Your private ruling application which we received.

· Independent evidence from the NSW Department of Primary Industries.

· Independent evidence from the Department of Employment, Economic Development and Innovation.

· Independent evidence from industry consultants and associations.

· Income and expenditure projections for your activity.

You did not include a copy of your business plan.

You are carrying on a business of growing which commenced in 2001, with the first planting in 2002.

You have and are expected to continue to have adjusted taxable income of over $250,000.

Your income and expenditure projections for your business provides that the business activity will become commercially viable in year 13 (income year ended 30 June 2015).

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).

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.

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

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 growing activities have a lead time between the commencement and 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.

Paragraph 21 of 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 1997 or produce a tax profit.

The independent evidence you have supplied from:

· the NSW Department of Primary Industries provides that a gross margin does not start being achieved until the trees are 7-15 years old

· industry consultants provides that you will receive net income over $20,000 in the 2010 production year.

You provide that:

· your first planting was in 2002, and

· your income and expenditure projections for your business provides that the business activity will produce assessable income over $20,000 in the income year ended 30 June 2010.

As a result, this shows that the commercially viable period for your industry/business activity is eight years.

In your projected income and expenditure statement you have projected that your business activity will not produce income greater than deductions attributable to it within this commercially viable period. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

Therefore the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997.

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