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Edited version of your written advice
Authorisation Number: 1013083308286
Date of advice: 2 September 2016
Ruling
Subject: Non-commercial losses and 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 your calculation of taxable income for the 20XX-YY income year?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 20XX
The scheme commences on
1 July 20XX
Relevant facts and circumstances
You purchased a tree plantation (the plantation).
The plantation was purchased as a going concern with pre-established trees.
These trees had already reached maturity prior to your purchase of the plantation.
You now operate a primary production business activity on the property, under a sole trader structure.
You intend to plant more trees in 20AA.
The settlement date for purchase of the plantation was mid 20XX.
You physically took possession of the plantation in mid20XX.
Your business activity started in 20XX.
Just prior to signing the contract of sale in for the plantation the previous owner's harvested the crop. This occurred in mid 20XX.
Mature tree leaves are harvested every 12 - 18 months over a life of up to 27 years.
Your first harvest was in late 20YY.
Your income for non-commercial loss purposes in the 20XX-YY financial year was more than $40,000 but less than $250,000.
In the 20XX-YY financial year your assessable income from the business activity was less than $20,000. In the following two financial years you have consistently had assessable income from your business activity of over $20,000.
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
Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.
Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless:
• the exception in subsection 35-10(4) of the ITAA 1997 applies; or
• you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or
• if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.
Your assessable income from sources not related to this activity was more than $40,000 in the relevant financial year. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.
Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the relevant financial year.
The Commissioner's discretion - lead time
You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.
Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioners 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.
TR 2007/6 sets out the Commissioners interpretation of the exercise of the Commissioners 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 one to four.
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.
It is accepted that it is in the nature of harvesting the crop there will be a lead time before a profit can be expected or, one of the tests passed. For this reason, your business activity has not satisfied one of the tests in the relevant financial year.
The information you have provided demonstrates that there is an objective expectation that there is an extended time between harvests. For this reason, your activity has not satisfied one of the tests in the 20XX-YY financial year but has satisfied the assessable income test in the 20YY-ZZ financial year.
Therefore, the Commissioner will exercise the discretion available in accordance with paragraph 35-55(1)(b) of the ITAA 1997 in relation to your primary production business activity for the relevant financial year.
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