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Edited version of private ruling

Authorisation Number: 1011891409683

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Ruling

Subject: Commissioner's discretion

Questions:

1. Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your livestock business activities in your calculation of taxable income for the 2009-10 financial year?

Answer: No.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your plantation business activities in your calculation of taxable income for the 2009-10 financial year?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You received a one off dividend of after the liquidation of a company. As a result of the dividend, your income for non-commercial loss purposes in the 20XX-XX financial year was above $250,000.

Your livestock activities produced a loss of approximately $XXX,000 in the 20XX-XX financial year.

Your plantation activities are carried out on approximately 140 hectares and were planted between 19XX and 19XX.

More than one third of the plantation was harvested in 20XX-XX financial year grossing approximately $XXX,000.

Harvest of the remaining plantation is due to commence in late 2011 and should provide similar returns.

Your plantation activities produced a loss of approximately $XX,000 in the 20XX-XX financial year.

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)(a).
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision

Multiple business activities

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each of activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

In your case, your livestock and plantation activities are conducted on the same property. The assets used in each activity would, for the most part, be different; however, there would be some equipment that could be utilised in both activities. The goods produced in each activity are vastly different and service vastly different markets. The activities are not interdependent and any commercial links would be incidental.

Based on the facts and the overall impression, your livestock and plantation activities are considered to be two separate business activities and Division 35 of the ITAA 1997 will be applied to each business activity separately.

Division 35

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 $XXX,000 in the 20XX-XX financial year.

Livestock activities

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

In your case, you received a one off dividend after the liquidation of a company. Receiving this dividend caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your livestock activities for the 2009-10 financial year.

Plantation activities

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is 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.

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.

In your case, planting of the plantation commenced in 19XX and has been, or is due to be, harvested in 20XX; or fifteen years after planting commenced. You have not provided any independent evidence to show the commercially viable period for your type of plantation. However, it is generally accepted that plantations of your type can be harvested at between eight and 15 years, depending on growth rates.

Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, your plantation activity will produce assessable income greater than the expenses attributed to it.

Therefore, the Commissioner will 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 plantation activities for the 20XX-XX financial year.

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