Edited version of your private ruling

Authorisation Number: 1012514083671

Ruling

Subject: Non Commercial Losses- Extended Lead Time

Question 1

Will the Commissioner exercise the discretion in paragraphs 35-55(1)(b) or 35-55(1) (c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your nut growing activity in your calculation of assessable income for the income year ended 30 June 2013?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced:

Year ending 30 June 2013

Relevant facts and circumstances

· You are a Grower in a nut growing project (the project) that was expected to makes it first tax profit at the end of the sixth income year of the project.

· The project has been subject to agricultural stress imposed by drought resulting in reduced growth, delayed maturity and biennial cropping, during the lead time.

· At the end of the sixth income year, the actual assessable income has fallen short of the attributable deductions.

· You provided:

o the project documentation;

o an independent expert report; and

o financial results and expectations, that show that the project has made a tax profit at the end of the seventh income year, and is expected to make a tax profit each income year thereafter until the end of the project.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 section 35-10

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

Income Tax Assessment Act 1997 section 35-55

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

Reasons for decision

Based on information provided with the application for this Ruling, specifically that special circumstances have resulted in the extension of the lead time, a Grower carries on a business of nut growing individually (alone or in partnership) and is (or has) expected to incur losses from their participation in the project for an additional income year which will be subject to Division 35. These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year.

The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non commercial business losses: Commissioner's discretion when exercising the discretion.

In the 2009-10 income year an income requirement was introduced to Division 35. This income requirement will apply to these Growers in the project for the sixth income year of the project. Where a Grower with income for NCL purposes of less than $250,000 (that is, the Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the Scheme described in this Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that:

· it is because of its nature that the business activity of the Grower will not satisfy one of the four tests in Division 35; and

· there is an objective expectation that within a period that is commercially viable for the nut growing industry, the Grower's business activity will satisfy one of the four tests set out in Division 35 or produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

In the sixth income year of the project, where a Grower with income for NCL purposes of $250,000 or more (that is, the Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that:

· it is because of its nature that the business activity of the Grower will not produce assessable income greater than the deductions attributable to it; and

· there is an objective expectation that within a period that is commercially viable for the nut growing industry, the Grower's business activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

A Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000:

· taxable income for that year (ignoring any loss arising from participation in the project or any other business activity);

· total reportable fringe benefits for that year;

· reportable superannuation contributions for that year; and

· total net investment losses for that year.

The project was expected to be profitable by the end of the sixth income year of the project, however due to agricultural stress imposed by drought resulting in reduced growth, delayed maturity and biennial cropping during the lead time, the actual assessable income was less than expected for that year.

Due to the nature of the business activity of growing nut trees, the lead time has been extended by these special conditions that were outside the control of the operator of the business activity. Therefore it is considered that inherent characteristics have prevented the Growers from satisfying a test, or producing assessable income greater than the deductions attributable to it, in the sixth income year of the project. As such, the business activity meets the requirements of subparagraph 35-55(1)(b)(i) or subparagraph 35-55(1)(c)(i).

To satisfy the requirements of subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii) there needs to be an objective expectation that the business activity will satisfy a test or make a tax profit within a period that is commercially viable for the industry concerned.

The information from the independent expert report and the actual and projected financial statements, provide evidence to support a conclusion that there is an objective expectation that the project is commercially viable. The business activity will have its first profitable year in the seventh income year of the project and therefore make a tax profit in that year, which will occur within the period referred to in subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii).

In this case the Commissioner's discretion would be exercised for the sixth income year of the project, as it would be unreasonable to apply the loss deferral rule.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).