Edited version of private ruling

Authorisation Number: 1011581082736

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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 the year ended 30 June 2010?

Answer:

No

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced:

1 July 2009

Relevant facts

You operate a primary production activity at a given location. You purchased the activity as a going concern at a specified cost price. You have provided a list of items included in the sale, time it takes to complete production and scale of operation in the past.

You incurred expenses but did not receive any assessable income from your activity in the first year of operation. You have provided details of assessable income received so far and income expected in the future.

You have provided actual income and expenditure details for the past year and projected income and expenditure for future years showing that the activity will generate profit in the future.

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 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.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-1

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 section 35-55

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

Reasons for decision

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (in conjunction with other tests) in order to include losses from a business activity in the calculation of taxable income. The 'income requirement' is set out in subsection 35-10(2E) of the ITAA 1997. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

The Commissioner's discretion in paragraph 35-55(1)(c) 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)).

A note to the above paragraph emphasises that the particular paragraph is intended to cover business activities that have a lead time between the commencement and the production of any assessable income.

Your primary production activity has a lead time between the commencement and producing assessable income as required by the Note to paragraph 35-55(1)(c) of the ITAA 1997. Therefore the Commissioner will consider whether the discretion should be exercised to allow you to claim losses from your activity.

You do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 as your income for the purposes of paragraph 35-55(1)(c) of the ITAA 1997 is more than $250,000. Your primary production activity has not made a tax profit for the year ended 30 June 2010. Therefore you cannot claim the losses from your primary production activity unless the Commissioner exercises his discretion.

In order to exercise the discretion, 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 period that is commercially viable for the industry.

The information you have provided in your application shows that the lead time for the industry concerned cannot be more than a few months.

The period that is commercially viable for a business activity does not commence from the time a business activity is purchased as going concern, rather it commences from when the activity is originally started by the previous owner.

You purchased the primary production activity as a going concern. Information provided by you indicates that it had been operating for several years before you acquired it. Therefore the commercially viable period in your case has already lapsed.

As explained in paragraph 21 of Taxation Ruling TR 2007/6, 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 or produce a tax profit.

As the period that is commercially viable for your situation has already lapsed, your activity should make a tax profit from the first year of purchasing it for you to claim the losses.

Your activity has been carried on as a business by you for only part of the year ended 30 June 2010. Income from the sales is not expected until the following year. However, the legislation does not stipulate to make a reasonable estimate to determine whether a profit would have been made, had the activity been carried on by you for the whole year.

The Commissioner is satisfied that it would be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your primary production activity. This would mean for the year ended 30 June 2010 any loss for your activity cannot be claimed in that year and should be deferred to a future income year. A deferred loss will be deductible against any taxation profit from your primary production activity or a similar business activity, in the future years.

Summary

Your primary production activity will not produce income greater than deductions attributable to it in an income year within the commercially viable period for the industry. Therefore the Commissioner will not exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997 in relation to your primary production activity for the year ended 30 June 2010. This would mean the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer any loss from you primary production activity for that year.

A deferred loss is not disallowed and will be deductible against any taxation profit from your activity or a similar business activity in the future years.

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