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Edited version of your written advice
Authorisation Number: 1013087466434
Date of advice: 8 September 2016
Ruling
Subject: Non-commercial losses
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 activity in your calculation of taxable income from financial year ending 30 June 20YY.
Answer
Yes
This ruling applies for the following period(s)
Financial year ending 20YY
The scheme commences on
1 July 20XX
Relevant facts and circumstances
In 20XX, you commenced operating a business breeding and selling livestock. You expect to start selling livestock early next year.
You expect the business to produce an assessable income of at least $20,000 in financial year ending 30 June 20ZZ.
You state that your income for non-commercial loss purposes in financial year ending 30 June 20YY was less than $250,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 35-10
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 33-55
Reasons for decision
Non-commercial losses
Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents losses from non-commercial activities that are carried on as businesses by individuals (alone or in partnership) being offset against other assessable income in the income year the loss is incurred.
The rule in subsection 35-10(2) of the ITAA 1997 defers losses from business activities unless:
a) you satisfy subsection 35-10(2E) of the ITAA 1997 (income requirement) and pass one of the four objective tests contained in sections 35-10, 35-35, 35-40 or 35-45 of the ITAA 1997;
b) an exception applies; or
c) the Commissioner exercises a discretion set out in section 35-55 of the ITAA 1997 for the business activity for that year.
To satisfy the income requirement your taxable income, reportable fringe benefits, report superannuation contributions and total net investment losses for that income year must be less than $250,000. You have stated that you meet the income requirement however you do not expect to meet any of the objective tests until 20ZZ. Further, the exceptions contained in subsection 35-10(4) do not apply as your assessable income from other sources is greater than $40,000.
On the facts provided, to allow losses from your business activity to be offset against your other income, you must rely on the Commissioner exercising a discretion set out in section 35-55 of the ITAA 1997.
Commissioner's discretion
Paragraph 35-55(1)(b) of the ITAA 1997 provides that the Commissioner may exercise a discretion not to apply the loss deferral rule in section 35-10 where the income requirement is met but the objective tests are not satisfied because of the nature of the business activity.
This 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.
TR Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides guidelines on how the discretion may be exercised to determine when it would be unreasonable for the loss deferral rule to apply.
Three elements must be satisfied to be eligible for the exercise of this discretion:
a) the business activity must have started to be carried on;
b) it is because of the nature of the activity that the activity does not pass any of the objective tests, and
c) the individual can show that there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will meet one of the objective tests or produce a tax profit.
The Commissioner accepts that you carry on the business activity of breeding and selling livestock.
In relation to the second element, for the failure to produce a tax profit to be 'because of its nature', the failure must be because of some inherent characteristic that the tax payer's business activity has in common with other business activities of that type.
The Commissioner accepts that business activities involving the breeding of livestock would be an activity where a period would pass before the activity could be expected to produce a tax profit, as it would necessarily include gestational periods and weaning. The initial inability to produce a tax profit typifies the industry overall, rather than just your particular business within that industry.
You state that you will meet the assessable income test contained in section 35-30 of the ITAA 1997 in the financial year ending 30 June 20ZZ. The Commissioner accepts that this is within a commercial viable period for the industry.
Consequently the Commissioner will exercise the discretion not to apply the loss deferral rule for the financial year ending 30 Jun 20YY.
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