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Edited version of private ruling
Authorisation Number: 1011807496816
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Ruling
Subject: Non commercial losses and the 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 livestock business in the calculation of your taxable income for the 2009-10 to 2012-13 financial years?
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
The scheme commenced on
1 July 2009
Relevant facts
In 1980, you bought a farm, in 2001 you leased a property and in 2002 you bought a further property.
You still hold all three properties.
The farm has an average of 500 head of livestock at any time of a year.
You originally farmed by fattening livestock.
In 2003, you commenced an embryo transfer program to breed full blood livestock. You used the female livestock you already held to inseminate.
You expect to make a tax profit in ten years from commencing breeding the livestock.
You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year and is likely to be more than $250,000 for the foreseeable future.
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
For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:
· you meet the income requirement and you pass one of the four tests
· the exceptions apply
· the Commissioner exercises his discretion.
In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.
The relevant discretion may be exercised for the income year in question where:
· it is in the nature of your business activity that there will be a period before a tax profit can be produced
· there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.
In your case, you have been fattening livestock since 1980. While the activity expanded with an additional two properties, it is considered that the activity commenced in the 1980 year. The nature of your activity predominantly has continued to be livestock breeding and this original activity has now changed to that of breeding full blood livestock.
Breeding of the pure bred livestock is merely a deviation to, or specialisation of your original business activity. This is demonstrated by the fact that you are using your existing herd as the hosts for the embryo transfer program.
You project that you will make a tax profit in the 2013-14 financial year. While this period could be considered a commercially viable period for breeding full blood livestock, the lead time allowed does not commence when you make changes to your existing activity. Rather, the lead time commences at the beginning of the original activity.
Therefore, the Commissioner can not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business for the 2009-10 to 2012-13 financial years as the commercially viable period has expired.
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