Edited version of private ruling

Authorisation Number: 1011621714957

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Ruling

Subject: Non commercial losses - Commissioner's discretion

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 cattle farming activity in your calculation of taxable income for the 2009-10 to 2011-14 income years, inclusive?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts

You first started breeding cattle in during the 1988-89 income year. Your cattle breeding activity has been conducted on a variety of properties since you commenced.

You have recently completed a pasture renovation, water and fencing improvement program. Your current property has been ploughed, levelled and seeded to pasture seed. Almost the entire property has been re-fenced.

You intend to lease a further property which will enable you to have a larger carrying capacity of breeders.

The property has a related current debt.

You have provided actual stock figures for the 2007-08 to 2009-10 income years, inclusive, and the projected maximum stock figures for the 2010-11 and future income years. The projected figures were provided by a management consulting firm specialising in agriculture.

You have provided actual income and expenditure figures for the 2007-08 to 2009-10 income years, inclusive, and the projected income and expenditure figures for the 2010-11 and future income years. The projected figures provided were based on the maximum cattle stocking figures (above).

You expect the farm related debt to be fully paid in the 2013-14 income year. This is when you will make a profit from the property.

Your income for non-commercial loss purposes for the 2009-10 to 2013-14 income years, inclusive, will be more than $250,000.

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

Summary

The reason your business activity is currently producing a loss is due to the renovations being undertaken on the property and the less than optimal stocking rates. The loss is not being generated due to something which is inherent to the nature of the cattle farming industry.

The commercially viable period for cattle farming is two to three years. As your business has operated for over 20 years, the Commissioner will not exercise his discretion to allow you to claim the business losses against your other income.

Detailed reasoning

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 requirements under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $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.

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 not peculiar to your situation.

You commenced your cattle farming business during the 1988-89 income year. Over the years the activity has been conducted on various properties owned by you and has essentially remained the same.

You have not provided any evidence from an independent source to establish the commercially viable period for your industry. However, the commercially viable period for the cattle farming industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached a saleable age. The commercially viable period for cattle farming is two to three years.

You state your business activity will not produce income greater than deductions until the 2013-14 income year when the farm related debt is extinguished. However, an examination of your figures indicates that a loss, albeit a small one, will still exist.

Even if you were to produce a profit in the 2013-14 income year, this will be 25 years after your business began which is outside the commercially viable period for your industry.

It is acknowledged that you have undertaken extensive renovations of the pasture, fencing and water on your current property which has resulted in lower stock numbers and income. However, this is a circumstance peculiar to your particular business activity and is not inherent to the nature of the industry. Where a 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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