Edited version of private ruling

Authorisation Number: 1011820789670

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

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 business in your calculation of taxable income for the 2009-10 to 2014-15 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
Year ended 30 June 2014
Year ended 30 June 2015

The scheme commenced on

1 July 1995

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling and the documents attached; and

· the record of conversation of a phone call with your tax agent.

You commenced a business of fruit growing in the relevant financial year in partnership with your spouse.

The fruit plants are established, having been planted approximately X years ago.

You currently produce a number of tonnes of fruit to the acre. Most has been sold to third parties with only small amounts retained by you to process under your own label to date.

A logo has already been designed which has been used as a label on produce and business cards to date. In the future, that logo will continue to be used on all marketing material including a website and letterhead.

A retail outlet and processing plant has already been built on the property and requires fit-out for completion.

The action plan you provided shows that you plan to: fit-out the processing plant by 2014; begin producing some of the end product in-house by 2015; and redevelop the retail outlet by 2016.

It is envisaged that you will gradually reduce the quantity of fruit sold to third parties over the coming years, engaging external producers to process products under your label, before eventually using all of your produce to make products onsite.

In a few years, you plan to be producing products under your label with X% of your produce, while Y% will still be sold as fruit to third parties. In a few more years you plan to be using 100% of your produce to produce your end product under your label.

The business is actively managed by your spouse.

You also employ one other staff member with many years experience working in the industry.

You have provided a copy of your business plan and projected income and expenditure, showing you expect to make a profit in the 2015-16 financial year.

You have provided the income and expenses projected for the 2009-10 to 2015-16 financial years, which you have based on actual figures from prior years with adjustments made according to CPI.

You will also be monitoring prices from time to time to ensure projected income truly reflects market conditions.

Small price rises are planned in the future once brand recognition and appreciation is achieved and after taking into account industry trends and business expenses.

You are adopting organic principles which have resulted in and will continue to result in reduced chemical fertiliser inputs.

Organic certification in the future would provide access to the niche organic market as well.

By incorporating organic principles, the crop has proved sustainable with minimal water and other inputs even through the toughest years of drought.

You have provided copies of independent reports regarding organic trends in your industry in Australia and overseas.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this will be the case for the 2010-11 to 2014-15 financial years as well.

The business has made losses from commencement 15 years ago to the present.

Reasons for decision

Summary

The Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2014-15 financial years as you have not shown that the losses in those years are caused by the inherent nature of the activity rather than due to your particular circumstances. Also, you have not shown that you will make a tax profit within a period that is commercially viable for the industry concerned.

Detailed reasoning

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.

A 'lead time' discretion is provided by 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.

Also, 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.

The period that is 'commercially viable' for the industry concerned is taken from the commencement of the activity.

In your case, the commercially viable period for your activity is taken from the date of planting and not from when you expand your activity to producing the end product. You have projected that your business activity will not produce income greater than deductions attributable to it until the 2015-16 financial year. This is 20 years after the planting was established.

The reason your business activity has not produced a profit for so many years is more to do with the continued expenses of the business being beyond what the income it produces can support. This is peculiar to your situation and is not inherent to the nature of the business.

You have provided information from independent sources that it takes four years for new plants to reach a commercial bearing age, but you have not provided objective evidence of the commercially viable period to make a tax profit for the industry.

Without this information the Commissioner is not able to conclude that the number of years your activity will take from commencement to the achievement of a tax profit is within a period that is commercially viable for your industry.

Therefore, the Commissioner will 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 2014-15 financial years

Further issues for you to consider

Where you can't claim your loss in the current year under the non-commercial loss rules, your losses can be deferred until a future year when your activities produce a profit.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).