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Ruling

Subject: non-commercial losses

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in the calculation of your taxable income for the 2009-10 to 2016-17 financial years?

Answer

Yes.

This ruling applies for the following periods

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

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You purchased a property where it was possible to establish your activity.

You took approximately one year to prepare the property to make it suitable for planting your product.

You have engaged a firm to provide farm management services.

You have provided evidence that states that harvest can start when the activity is six years old with peak production being reached in year twelve. A prospectus also states that some production can occur within five years of establishment and that semi-commercial yields can be achieved within seven years.

You have submitted testimony which states that based on conservative assumptions, it is expected that a certain amount per hectare will be found in years six to seven.

You have provided a report that makes the following comments on the commercial viability of the business activity:

§ the first product will be produced in year four;

§ commercial production will occur in years six to seven

§ good harvests should be made by year ten

§ the wholesale price in today's market.

You plan further plantings of the product on the farm in the future.

You expect to make a profit eight years after the initial planting.

You do not meet the $250,000 income requirement set out in paragraph 35-10(2E) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1

Income Tax Assessment Act 1997 Subection 35-10(2E)

Income Tax Assessment Act 1997 Section 35-55

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

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the Income Tax Assessment Act 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.

Taxation Ruling TR 2007/6 discusses the Commissioner's application of the non-commercial loss provisions and provides the following information in relation to commercially viable period.

… that independent evidence may not always allow for the identification of any one year in which business activities in the industry concerned, operating in a commercially viable manner, are typically expected to satisfy one of the four tests or produce a tax profit. Instead, this evidence at best may point only to the period that is commercially viable for the industry concerned, for the purposes of subparagraphs 35-55(1)(b)(ii) and (c)(ii), being a range of years.

As a matter of practice to deal with this possibility, and to cater for those business activities which do not commence right at the start of a particular income year, but towards the end of that year, a tolerance of at least one year beyond the income year otherwise identified as the end of this period will be applied.

Having regard to your full circumstances and taking into account the guidance provided by Taxation Ruling TR 2007/6, it is accepted that it is in the nature of the business activity that has prevented you making a tax profit. 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 2016-17 financial years.

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