Edited version of private ruling

Authorisation Number: 1011635344083

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Ruling

Subject: Non Commercial Losses- Commissioner's discretion - Lead time.

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 (including carry forward losses) from your primary production activity in your calculation of taxable income for the relevant income year?

No.

This ruling applies for the following periods

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 in partnership. The business activity has been in operation for several years.

The produce from the activity is sold to merchants in the relevant industries.

You expected to receive income and generate a profit in the relevant income year. However, due to unavoidable circumstances you were unable to achieve the expected income.

Your activity relies on natural resources to generate income. Unavoidable circumstances have prevented you from receiving the required amount of resources either naturally or through other organisations.

With regards to the inherent or innate feature of the activity you have stated that:

· The area had been affected by unavoidable circumstances for a considerable period.

· During the period affected by unavoidable circumstances, your access to resources provided by an organisation was also limited severely impacting on your ability to produce sufficient products to cover your costs.

· Your activity last reported a net profit some years ago.

Unavoidable circumstances in the region have severely impacted on your primary production activity. As a consequence, for the past years you were unable to generate sufficient products. Therefore, the financial performance of the business activity has been poor.

You have carry forward losses from previous years. You are seeking to deduct these losses against your other income received in the relevant income year.

You have provided copies of documents in relation to your business activity.

You have stated that unavoidable circumstances affected the business activity, hence the number of years before the activity becomes commercially viable is Z years after the effect of those circumstances.

In a previous private ruling application you advised that you did not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 in the relevant income year.

Therefore, you have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the primary production activity for the relevant income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 paragraph 35-10(2).

Income Tax Assessment Act 1997 paragraph 35-10(3).

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 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'exception' in subsection 35-10(4) of the ITAA 1997 applies, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain 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.

In your case you have stated that you have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

Your primary production activity will only be potentially subject to these provisions if it is carried on as a business. 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.

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

In order to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997, 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.

The partnership has been conducting the primary production activity for few years.

Your primary production activity commenced in the 198X year. You have received income and generated profits from the activity during the past years.

The Commissioner accepts that the primary production activity 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 in Division 35 of the ITAA or produce a tax profit.

You have stated that unavoidable circumstances affected your business activity, hence the number of years before the activity becomes commercially viable is Z years after the unavoidable circumstances affected the activity.

Although you have not provided independent evidence of the lead time for your primary production activity, the information available in the websites indicates that the time required to get to the income producing stage is a couple of months. The produce is ready for sale the following income year. Therefore, income from one of the components of the activity is expected within Z years.

The other components of the activity can generate income sooner than the first component.

On that basis the commercially viable period for your primary production activity cannot be more than Z years. This is evidenced by the income you have received from the activity in the past.

The commercially viable period starts when the activity first commences and not in a subsequent year. Therefore, the commercially viable period for your primary production activity has lapsed.

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.

Accordingly, it would be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your business activity for the relevant income year.

In view of the above, the carry forward tax losses cannot be deducted against other income in the relevant income year.

Summary of reasons for decision

The Commissioner will not exercise the discretion in 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, and

· the commercially viable period for the primary production activity has lapsed.

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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