Edited version of private ruling

Authorisation Number: 1011608075466

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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 relevant income year?

Answer: No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are conducting a primary production activity on several properties.

You commenced the primary production activity in 200Y. Since then you have been involved in this activity. Due to unavoidable circumstances you had to sell your trading stock and you have now commenced rebuilding the activity.

You have stated that the rebuilding process is very slow.

During the rebuilding process you purchased trading stock and also a new property to diversify your activity.

You have stated the process of rebuilding the activity and the time it takes to complete each component of the activity.

Although you are conducting the activity in several properties, you have returned the income and expenses as one primary production activity in your income tax returns.

You joined the relevant professional association and since last year you have been on the association's executive committee.

In the current year you have spent a considerable amount of money on maintaining the property.

You have stated that you are unable to provide the financial and other statements for the future years as you do not know how unavoidable circumstances and numerous other external factors will affect on the sales.

You have provided the income and expense statement for the relevant income year.

You have enclosed a copy of a letter and photos of the property.

As you have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997, 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 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 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 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.

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 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:

(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)).

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.

In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 for the relevant income year. Therefore you need the Commissioner's discretion to claim the losses in those income years.

You have stated that your primary production activity is carried on as a business and this ruling is made on the basis of accepting this claim.

You commenced the primary production activity in 198Y. Due to unavoidable circumstances you reduced your activity. Since then you have been rebuilding the activity.

During the process of rebuilding your activity you purchased new trading stock.

You have received income from the activity in the relevant income year. You have also declared income from the activity in your past income tax returns.

Although the income from the activity has been low in some years, the income tax returns indicate that the primary production activity has been continuing.

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 your primary production has a lead time between the commencement and producing any assessable income.

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 or produce a tax profit.

The commercially viable period for your activity will be from the commencement of the business activity and includes a time to complete the components of the activity.

Although you have not provided independent evidence to suggest a lead time, you have stated the steps you need to fulfil prior to selling the trading stock.

On that basis the time required to complete the various components cannot be more than A to B years.

You have commenced the primary production activity several years ago. You have received income in excess of $20,000 thus satisfying the assessable income test in section 35-30 of the ITAA 1997 in previous years. Accordingly the commercially viable period for your primary production activity has lapsed.

Since the commencement of the activity you have purchased assets, improved the property and added additional facilities. You have stated that you are re-building your activity following the unavoidable circumstances that affected the activity. You have also slightly diversified your activity from what you were previously engaged. You have not commenced a new activity. Purchasing a different kind of trading stock does not change the commencement date of the primary production activity.

The information you have provided does not indicate when you are expecting a profit from the activity.

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 primary production activity for the relevant income year.

Summary of reasons for decision

The Commissioner will not exercise the discretion under 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 primary production activity that it has not produced a taxation profit within the commercially viable period;

· the commercially viable period for the industry has lapsed; and

· the breeding and stud activities in respect of the specific breed of stock is not considered a separate and distinct activity from your other breeding activities. As such, the stud does not have a new lead time.

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 primary production 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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