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Edited version of private ruling

Authorisation Number: 1011720106175

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Ruling

Subject: 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 fruit growing business in the calculation of your taxable income for the 2009-10 income year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You purchased an established fruit growing business.

The business had been established for many decades but was unproductive and unprofitable at that time you acquired it.

The main reasons for this were that many of the trees were very old and their productivity was in decline and the produce was no longer meeting the demand of today's market.

Much of the original produce was for the canned fruit market with only a small portion of the produce used to supply the fresh fruit market.

Demand for canned fruit has declined in recent decades and, as a consequence, the prices offered for these fruits have also declined.

Your plans for the business include:

You started re-planting and plan to have 50% of your property re-planted with varieties to supply the fresh fruit market by 2012.

The 2004 plantings are now fully productive; however, you do not expect to make an overall tax profit until the 2013-14 income year.

Your income for non commercial loss purposes for the income year was 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)

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 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 requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non commercial loss purposes is above $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 (paragraph 35-55(1)(c) of the ITAA 1997).

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 is not peculiar to your situation.

Where an ongoing business activity is purchased by a new owner, the 'period that is commercially viable for the industry concerned' is taken from the commencement of the activity, not from when the business was purchased by the new owner.

When you purchased the business in 2001, the business had commenced decades earlier. Therefore, the period that is commercially viable for your business activity has already expired.

This is the case even though you are in the process of re-planting to cater to a fresh fruit market rather than the canned fruit market. These types of changes would be considered a normal part of any fruit growing business in order to adapt to changing tastes and needs in the market place.

The re-plantings are not considered a new or different business activity from the existing business. They are located on the same property and the assets used on the existing and re-planted parts of the orchard are the same. Although the replanted areas are aimed at a fresh fruit market rather than the canneries, the product is essentially the same and the commercial links between the two are more than incidental. All areas of the business are interdependent on each other.

Therefore, as the period that is commercially viable for your fruit growing business activity has long since expired, the Commissioner is not able exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997.

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