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Edited version of private ruling

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Ruling

Subject: Commissioner's discretion - lead time

Question:

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your farming enterprise in your calculation of taxable income for the 2009-10 income year?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You purchased a farm in the recent year and purchased livestock soon after.

In the 2010-11 income year, your livestock numbers have increased by at least 50 per cent through natural increase.

You and your spouse conduct your farming enterprise under a partnership structure.

You are currently employed for 40 hours a week away from the farm and spend approximately 17 hours a week on your farming enterprise.

In the relevant recent income year, you earned in excess of $40,000 from your employment activities.

Your business plan states that you aim to sell some of your livestock in the subsequent income year and again in another subsequent income year.

You also intend to carry out soil improvements to increase your carrying capacity.

Your projected income and expenditure statement shows that your farming enterprise will meet the assessable income test in the subsequent income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Subsection 35-10(4)

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

Reasons for decision

Exception 

Under subsection 35-10(4) of the ITAA 1997, there is an exception to the general non-commercial loss rules in Division 35 of the ITAA 1997 where the loss is from a primary production business activity or a professional arts business activity and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain). 

In your case, as the assessable income you received from your other employment was greater than $40,000 in the 2009-10 income, this exception will not apply.

The Commissioner's discretion - lead time 

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioners discretion can be exercised where: 

TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this Ruling. 

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying tests 1 to 4. 

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The 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. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 

In order to demonstrate that the objective expectation exists, a business operator should produce evidence showing that the business activity will satisfy one of the tests or produce a tax profit, showing the period within which a commercially viable business would do so. Preferably, this evidence will be documented at the time, and the evidence that the business activity will satisfy one of the tests or produce a tax profit within a certain time will be consistent with evidence from independent sources relating to activities of that type. Appropriate independent sources include industry bodies or relevant professional associations, government agencies, or other taxpayers conducting successful comparable businesses. 

You have not provided any evidence from an independent source to establish the commercially viable period for your industry/business. However, it is accepted that the commercially viable period for your industry is two to three years.

Based on this, your business activities should satisfy a test or produce income greater than deductions attributable to it by the 2012-13 income year.

In your projected income and expenditure statement you have projected that your business activity will satisfy a test or produce income greater than deductions attributable to it in the 2011-12 income year which is within the commercially viable period for your industry/business.

Therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to offset the losses made from your farming activities against your other assessable income for purposes of calculating your taxable income for the 2009-10 income year.

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