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Ruling

Subject: non-commercial losses

Question

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 business activity in your calculation of taxable income for the 2010-11 to 2014-15 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

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

12 March 2011

Relevant facts

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

You carry on a primary production business which you commenced in 2011 with the purchase of an established station.

It is your intention to build a multi species diversified livestock enterprise.

The property is productive with above average soil type and has reliable rainfall.

The property infrastructure is well established from prior ownership with ongoing repair and maintenance required.

You have budgeted plans for further upgrading.

It is your opinion that the type of existing livestock is unsuitable and you intend to replace them with a different variety. You have begun this initiative with the sell down the current variety of livestock.

You plan to restock with alternative livestock.

You submit that it will take some time to re-establish the appropriate type and number of livestock that the station can support and ultimately produce positive cash flows. During this time you intend to reduce debt and undertake capital expenditure.

You expect to make a tax profit in the 2015-16 financial year.

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)(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 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.

Taxation Ruling TR 2007/6 discusses non commercial losses and the application of paragraph 35-55(1)(b) . Paragraph 84 of the Ruling states:

The Commissioner needs to be satisfied that there is an objective expectation that the business activity will satisfy a test or produce a tax profit in some future income year falling within a period that is commercially viable for the industry concerned. If the business activity is not expected to satisfy a test or produce a tax profit within this period then the discretion will not be exercised.

Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied.

As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542 (Scott's Case), the court upheld the Commissioner's decision in not applying the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years.

The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis.

In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the court expressed the following view:

It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…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 purchased a going concern with well established infrastructure and existing stock.

Where an ongoing business activity is purchased by a new owner, the 'period that is commercially viable for the industry concerned' is taken from the commencement of the activity, not from when the business was purchased by the new owner.

The continuity of activity ensures that there in no new business activity commenced when the property was purchased by you. Your decision to change livestock varieties does not reset the lead time or your activity, it is a unique business decision made by you in the course of carrying on an established primary production activity.

Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2010-11 to 2014-15 financial years as the commercially viable period for your industry has passed.

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