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Ruling

Subject: Non-commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2010-11 to 2012-13 financial years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2000

Relevant facts and circumstances

You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a primary production business primarily devoted towards mixed fruit growing.

Farm business operations began over ten years ago. You have grown a variety of different crops which you have sold in various forms.

You expect to pass the assessable income test in the 2013-14 financial year.

You have provided independent evidence as to a lead time of four years.

Moving forward, you plan to move away from the juice business to concentrate on fruit growing.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

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

Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 the business activity that there will be a period of time before it can be expected to pass one of the four tests

· there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry.

Paragraph 35-55(1)(b) of the ITAA 1997 is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

In the case of Scott Scott v. Commissioner of Taxation [2006] AATA 542; VS2005/31-33, additional plantings made at a later time were not permitted to be included in the commercially viable period, as follows:

The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities.

In your case, you commenced business operations over ten years ago. You have submitted independent evidence which attests to a lead time of four years. It follows then that the commercially viable period of 4 years has expired for the purpose of this private ruling. Also, following the decision in the case of Scott, your decision to change and add additional crops and perform improvements to the property over a gradual period does not fall for consideration because you were producing income from crops which had already reached maturity.

To conclude, your decision to plant a number of different types of crops over a number of years does not reset the lead time for your activity. It follows the Commissioner cannot exercise his discretion in your case because the objective commercially viable period has expired.

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