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Edited version of your private ruling
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Ruling
Subject: Non-commercial losses
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 primary production business in your calculation of taxable income for the 2009-10 to 2012-13 financial years?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ending 30 June 2013
The scheme commenced on
1 July 2009
Relevant facts
Your annual income external to the relevant business activity exceeds $250,000.
You purchased an established primary production property in 2007.
The initial produce crop (2008) was sold.
The 2009 crop was the first crop to be used to produce your own end product under your own label.
For the 2009, 2010 and 2011 years, your product has been processed by experts in the field.
It is your intention to continue to utilise these experts to process your product in the future, subject to cost.
The senior expert has stated that your product requires a minimum maturation period of eighteen months to two years to be ready for consumption.
The product produced from the 2009 harvest and was available for sale in the 2011-12 financial year.
The product produced from the 2010 harvest and was available for sale in the 2012-13 financial year.
The product produced from the 2011 harvest is still being processed.
Your product will be released at various stages of maturity over a three year period, meaning you will not reach maximum sales until the 2013-14 financial year.
Your profit and loss projections show you expect to produce an overall profit in the 2013-14 financial year when your first three years product are available for sale.
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)(c).
Reasons for decision
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 was above $250,000 in the 2009-10 to 2011-12 financial years and you expect this will be the case in the 2012-13 financial year as well.
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 (paragraph 35-55(1)(c) of the ITAA 1997).
In your case, you have provided some evidence to show that your product requires a minimum maturation period of eighteen months to two years to be ready for consumption. This, along with the release of your product at various stages of maturity over a three year period, means you will not reach maximum sales until the 2013-14 financial year. Your profit and loss projections show you expect to produce an overall profit in the 2013-14 financial year or five years after the 2009 harvest.
Based on the general evidence available, the Commissioner is satisfied that there is an objective expectation that within a period that is commercially viable for the industry, the 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 primary production business activity for the 2009-10 and 2012-13 financial years.
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