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Edited version of private ruling

Authorisation Number: 1011820062327

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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 fruit growing in your calculation of taxable income for the 2009-10 to 2014-15 financial years?

Answer

Yes.

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
Year ended 30 June 2015

Relevant facts

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

You commenced a business of fruit farming in the relevant financial year including the production of the fruit, bottled fruit, processing of fruit into products for third parties and onsite rental accommodation.

You conduct the enterprise on a property you acquired in late 200X consisting of more than Y trees, a processing plant and onsite rental accommodation.

You intend to sell produce under your own brand name, plus derive external processing income and onsite rental accommodation income.

You have provided a business plan.

You established the fruit trees from scratch. Based on expert advice, the property has a mix of fruit trees suitable for making various products.

Early tree development was impacted by the drought and is now addressed with an extensive irrigation system.

The drought severely affected the property and the enterprise conducted on it in terms of expected early growth and has delayed fruit set in the trees and attendant fruit production.

You expect to make a tax profit from your business in the 2015-16 financial year (that is, a number of years from when you commenced business).

You have provided independent information sourced from an industry expert that it should take a few years for the farm to cover direct production costs as a minimum.

You have also provided a fact sheet from the Department of Primary Industries (DPI) stating that fruit production will commence in two to three years and a good commercial crop can commence by four to five years after tree planting. Their advice also notes that full commercial production does not begin until 9-10 years and that yields up to year 7 can be highly variable.

Information provided from a DPI document also states that gross margins are not profit figures as overhead costs are not taken into account and suggests that the time frame to full commercial production may be different to the time frame to taxable profitability.

Your adjusted taxable income for non-commercial loss purposes for the 2009-10 financial year was more than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-55(1)

Reasons for decision

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless:

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 you 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:

Having regard to your full circumstances, it is accepted that it is the nature of the business activity that prevents you making a tax profit in the years in question. It is also accepted that you will make a tax profit within the commercially viable period for your industry.

Consequently the Commissioner will exercise his discretion in the 2009-10 to 2014-15 financial years.

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