Edited version of your private ruling

Authorisation Number: 1012561750696

Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)(lead time) to allow you to include any losses from your business in your calculation of taxable income for the 2012-13 financial year?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

For the 2012-13 financial year, you do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997, due to a one off payment received from your employer.

You purchased land in several years ago with the intention of converting the use of the land to a primary production activity.

When purchased, the land was not set up for your activity but was instead being used for other primary production purposes by the previous owners.

You chose to stagger the conversion of the land.

You expect to have the land fully converted by 20XX.

You anticipate your business will produce assessable income greater than the deductions attributed to it by 20XX, after full conversion of the land.

It is considered that lead time for activities in your industry is two years.

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 ITAA 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, or

· 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 you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

You have asked that the Commissioner exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997. The discretion in paragraph 35-55(1)(c) can only be exercised if the taxpayer can demonstrate that "because of its nature", the business activity has not or will not produce assessable income greater than the deductions attributable to it but there is an "objective expectation" of this occurring within a period that is commercially viable for the industry concerned.

In Case 1/2013 [2013] AATA 3 the taxpayer purchased a property in the Margaret River, Western Australia to establish a vineyard. Rather than planting all the vines outright, she proposed a gradual or 'staggering' approach to planting vines. The AAT affirmed the Commissioner's refusal to make a private ruling to exercise the section 35-55 discretion. The AAT considered that the staggering approach did not satisfy the test in the Eskandari case (Eskandari v Commissioner of Taxation [2003] AATA 295), ie the failure to produce sufficient assessable income was not "a result of some inherent feature of the taxpayer's business activity [had] in common with business activities of that type (emphasis added)".

Taxation Ruling TR 2007/6 explains at paragraph 78 that the consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity and would not result in the requirements of subparagraph 35-55(1)(c)(i) being met.

The discretion in paragraph 35-55(1)(c) 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. It is not intended to be available in cases where the failure to make a profit is for reasons other than the nature of the business itself. For example, failure as a consequence of an initial small scale activity or other business choices made by an individual that are not consistent with the ordinary or accepted practice in the relevant industry.

In your case, your commenced your business several years ago. You acquired land and commenced converting the land as time, manpower and cash flow allowed. You anticipate that the farm will be fully converted by 20XX, at which time the business will produce assessable income greater than the deductions attributable to it.

As in Case 1/2013, your decision to stagger the conversion of land does not satisfy the test in the Eskandari case. That is, the failure to produce sufficient assessable income was not a result of an inherent feature of the industry.

You provided an objective expectation that by 20XX, once the land is fully converted, the business will produce assessable income greater than the deductions attributable to it, however this expectation is X years after the commencement of your business, which is outside the lead time period that is commercially viable for the industry.

As such the Commissioner is unable to exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997. Any losses from your farming business for the 2012-13 financial year will be subject to the 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).