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This edited version has been archived due to the length of time since original publication.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.

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Edited version of private ruling

Authorisation Number: 1011608424043

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 fac sheet has more information.

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Ruling

Subject: Commissioner's discretion with regard to losses

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 activity (the Project) in your calculation of assessable income for the 2010, 2011 and 2012 income years?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced in:

Year ending 30 June 2007

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a Grower in the Project.

You funded your participation in the Project by using your own funds. You did not enter into any borrowing arrangements to fund your participation in the Project.

You fail to satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and therefore losses incurred in relation to the project are subject to the loss deferral rules in section 35-10 of the ITAA 1997.

Summary of the scheme

The scheme that is the subject of this private ruling is specified below. The scheme incorporates the following documents:

For the purposes of describing the scheme to which this private ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which you as a Grower in the Project, or any of your associate will be a party to, which are a part of the scheme.

Your business of primary production commenced at the time of execution of your Allotment Management Agreement and Allotment Sub-Lease Agreement.

Overview of the Scheme

As a Grower in the Project, you or your nominee subscribed for the equivalent number of units in the Asset Trust which will own the land and establish the Orchard.

The Project Manager subleased Allotments of Land, or multiple thereof, and a specific number of Trees per Allotment to each Grower pursuant to an Allotment Sublease Agreement. The Project Manager also granted each Grower the right to use the Water Licences to obtain water to irrigate the Grower's Allotment. You subscribed at least XX Allotments.

The trustee of the asset trust plants the growers' trees under the Trust Deed.

Pursuant to the Allotment Sub-Lease, all the trees were planted by the particular month in the relevant year.

Under an Allotment Management Agreement, each Grower appointed the Project Manager to provide services that are usual or necessary for operating the particular orchard on each Grower's Allotment, including farming services, administration and managements services, harvesting services and crop processing services. The Project Manager will provide those services itself or through its subcontractors, including the Orchard Manager.

The Project Manager arranged for the irrigation system for the Grower Project to be installed.

The Project Manager will harvest, process and sell the crop from the Growers' Allotments on a collective basis. The proceeds of the sale will be divided according to the number of Growers' Allotments contributing produce for sale after deduction of fees and outstanding liabilities owing under the Allotment Management Agreement or the Allotment Sublease Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 section 35-10

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)

Detailed reasoning

Summary

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your growing activity in your calculation of assessable income for the 2010, 2011 and 2012 income years.

Detailed reasoning

Are you carrying on a business of primary production?

The Commissioner's discretion in section 35-55 of the ITAA 1997 applies if you are carrying on a business. Taxation ruling TR 97/11 Am I carrying on a business of primary production? sets out the general indicators used by the Courts in determining whether an entity is carrying on a business.

In relation to a managed investment scheme similar to that which is the subject of this ruling, the Full Federal Court in Hance v. FC of T Hannebery v. FC of T [2008] FCAFC 196; 2008 ATC 20-085 applied these principles to conclude that 'Growers' in that scheme were carrying on a business of producing almonds (at FCAFC 90; ATC 90).

Paragraph 13 of TR 97/11 lists indicators that are relevant in determining whether a business is being carried on. Application of these principles to your arrangement leads to the conclusion that provided you stay in the Project until its completion, you are carrying on a business of primary production involving growing and harvesting a particular crop for sale.

Further evidence for this view is found in Taxation Ruling TR 2000/8 Investment schemes (TR 2000/8). Although withdrawn this ruling continues to apply to schemes begun to be carried out before 1 July 2008. Features which are relevant to determining whether an investor's involvement in a managed investment scheme amounts to that investor carrying on a business are listed in paragraphs 36 and 37 of TR 2000/8.

To the extent that the features listed in paragraphs 36 and 37 of TR 2000/8 do not detract from a finding that the investor is carrying on a business, paragraph 35 of TR 2000/8 provides that a business will be carried on by the investor where:

In this case, a weighing of the indicators and factors contained in TR 97/11 and TR 2000/8 allows for the conclusion that you are carrying on a business.

Division 35 - deferral of losses from non-commercial business activities

As you have stated in your private ruling application, it is expected that you will incur losses from your participation in the Project which will be subject to Division 35 of the ITAA 1997. The loss deferral rule in section 35-10 of the ITAA 1997 will apply to disallow losses from your business activity that are ordinarily deductible under another provision in the year it is incurred unless an exception applies or, for each income year in which the losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) of the ITAA 1997 on June 30 of the specific income year.

As you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 and believe that you will have excess deductions from a business that - based on an objective assessment - is a commercial business, the Commissioner may decide to exercise a discretion under paragraph 35-55(1)(c) of the ITAA 1997.

In order for the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to be exercised, the Commissioner must be satisfied that:

The cash flow predictions for a Grower in this Project predicts that assessable income is expected to be derived after four years and an annual profit will be made after six years.

The crop yield estimates in the expert's report are consistent with wider industry estimates for the particular orchards. Therefore, a profit may be realistically expected within a commercially viable period of time.

Accordingly, the Commissioner will exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income for the years ending 30 June 2010, 30 June 2011 and 30 June 2012.


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