1011826105892 | Legal database

Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011826105892

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 and the Commissioner's discretion

Question 1

Are you considered to be carrying on a single business activity of primary production?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) or (c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activity in the calculation of your taxable income for the 2009-10 to 2013-14 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

The scheme commenced on

1 July 2009

Relevant facts

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:

· the application for private ruling for planting on property one commencing 1999;

· the application for private ruling for planting on property one commencing 2004;

· the application for private ruling for planting on property two commencing 2006;

You purchased a property in 19XX.

In 19XX, you planted approximately X produce.

You planted further produce in each of the 2004 to 2007 years.

In 20XX, you purchased a separate property a short distance away on which you planted produce in 2006, 2007 and 2008.

In your applications, you state that the commercially viable period for your industry is X years.

All the produce are managed by a farm management company.

The yield has been reduced because the amount of fertiliser applied after a bumper crop in one year was not appropriate.

You state that the following circumstances have affected your crop:

· The weight of the crops produced from the business activity

· The poor quality of the crops produced

· The impact of the global financial crisis (GFC) on prices

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income 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 Paragraph 35-55(1)(a).

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.

Lead time

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.

It is accepted that the commercially viable period for your industry is X years. Therefore, we need to consider when the commercially viable period began.

Taxation Ruling TR 2001/14 provides a table of relevant factors concerning identifying separate business activities:

Factor	'for' there being separate and distinct business activities	'against' there being separate and distinct business activities
Location	Different types of activities carried on at different locations	Different types of activities carried on but all at the same location
Assets used	Different types of assets used in carrying on separate activities, with no, or very little, crossover or commonality of use	Some different assets used in carrying on separate activities but many assets common to all
Goods/services produced (incl. market conditions)	Significant differences in the type of goods/services produced from the separate activities and in the conditions affecting their sale	Different types of goods/services produced but significant similarities in the manner produced and/or marketed
Inter-dependency	No, or very little, interdependency between the separate activities	Separate activities carried on but significant level of interdependency between them in terms, for example, of working capital support, customer base, manner in which activities carried out
Commercial links	One set of activities is inherently unprofitable and has no, or only minimal, commercial basis on which it could support the other activities	One set of activities may be inherently unprofitable but it supports the other activities, for example through increasing their sales base

In your case, factors which suggest that only one activity is being conducted are:

· Two of the plantings are on the same property and the other is only a short distance away

· All plantings are of the same produce

· One management agency manages all the produce.

It is considered that only one activity is being conducted, albeit the plantings are over a number of years.

While it is accepted that there is a lead time between planting produce and producing a commercially viable crop from those produce, the commercially viable period starts when the first produce were planted. Your business choice to plant produce over a number of years does not affect the commencement of the lead time.

Therefore, as the first tree planting was in 19XX, the commercially viable period has expired. Consequently the Commissioner will not exercise his discretion for the 2009-10 to 2013-14 financial years.

Special circumstances

The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'Special circumstances' are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity, including drought, flood, bushfire or some other natural disaster.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

In your case, you state that the yield has been reduced because the amount of fertiliser applied after a bumper crop in one year was not appropriate and the activity was also impacted by the GFC.

While the application of fertiliser is undertaken by a manager, it is not considered to be out of your control, as, for example, a natural disaster would be. Furthermore, lower prices due to the impact of the GFC is not considered to be a special circumstance as envisaged by Division 35.

Consequently the Commissioner will not exercise his discretion for the 2009-10 to 2013-14 financial years.

Copyright notice

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).