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Edited version of your written advice
Authorisation Number: 1012722746023
Ruling
Subject: Commissioner's discretion for lead time
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 the calculation of your taxable income for the 2012-13 to 2016-17 financial years?
Answer:
Yes.
This ruling applies for the following period(s)
Year ended 30 June 2013
Year ended 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on
1 July 2012
Relevant facts and circumstances
You commenced your primary production business activities in the 2012-13.
Your profit and loss projections show that you expect to produce assessable income of more than $20,000 in the 2017-18 financial year with an average price per kilogram for your produce.
You have provided independent evidence from a government source which suggests the commercially viable period for this activity is six years.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 35
Income Tax Assessment Act 1997 - Section 35-10
Income Tax Assessment Act 1997 - Section 35-30
Income Tax Assessment Act 1997 - Section 35-35
Income Tax Assessment Act 1997 - Section 35-40
Income Tax Assessment Act 1997 - Section 35-45
Income Tax Assessment Act 1997 - Section 35-55
Reasons for decision
The Commissioner's discretion - lead time
Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where:
• the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and
• there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year.
Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997. The following has been extracted from paragraphs 70 to 104 of this Ruling.
The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying tests 1 to 4.
This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph 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. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business.
In order to demonstrate that the objective expectation exists, a business operator should produce evidence showing that the business activity will satisfy one of the tests or produce a tax profit, showing the period within which a commercially viable business would do so. Preferably, this evidence will be documented at the time, and the evidence that the business activity will satisfy one of the tests or produce a tax profit within a certain time will be consistent with evidence from independent sources relating to activities of that type. Appropriate independent sources include industry bodies or relevant professional associations, government agencies, or other taxpayers conducting successful comparable businesses.
You have provided evidence from an independent source to establish the commercially viable period for your industry/business is up to six years.
The information you have provided shows your estimated income from your activities will be greater than $20,000 in year six. Therefore, there is an expectation that that your business activities will pass one of the tests (the assessable income test) within the commercially viable period for the industry.
Therefore, the Commissioner will exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your business activities against your other assessable income for purposes of calculating your taxable income for the 2012-13 to 2016-17 financial years.
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