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Edited version of your written advice

Authorisation Number: 1051316159871

Date of advice: 6 December 2017

Ruling

Subject: Non-commercial losses - Commissioner’s discretion 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 2017 financial year?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You purchased a property to establish an Asset X farm.

You intend to make $20,000 in assessable income in the 2021 financial year.

You have ordered Asset X. These are due for delivery in the 2018 financial year.

The delay in delivering Asset X is due to an industry wide delay.

You intend to expand your farm using the staggered approach.

You currently have Asset Y to help maintain the property until Asset X is delivered.

You intend to increase numbers of Asset Y in the future.

You will become a member of the Asset X Association.

You are currently repairing the property and improving it in readiness for the Asset X.

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)(b)

Reasons for decision

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless:

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where:

The note to section 35-55 of the ITAA 1997 which contains the discretion states this discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

The note above does not support any view that the discretion should available where the failure to make a profit is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned

Before the Commissioner can consider his discretion, he must be confident that the business has actually commenced. If an activity isn’t considered to have commenced, the Commissioner cannot consider exercising his discretion.

Paragraph 105 of Taxation Ruling TR 2001/14 Income tax: Division 35 – non-commercial business losses, states that for a business activity to have commenced a person must have:

All factors are necessary to be able to conclude that a business has commenced. Whilst you would have satisfied the first factor, even with the decision to order the stock, you haven’t satisfied the second factor being ‘acquired’ the minimal level of business assets. Without the stock purchase, you could not possibly satisfy the third factor, which is the commencement of the business operations. This would occur when you have planted Asset X.

If you have incurred expenses before commencing the business of primary production, these expenses are not deductible as they are considered preparatory activities according to paragraph 41 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production.

Paragraph 28 to 30 of TR 97/11, provides guidance as to whether a business is carrying on a business of primary production. The business must have significant commercial purpose or character which is particularly linked to the size and scale of the activity, the repetition and regularity of the activity and the profit indicators. The limited numbers of Asset Y you currently have on your farm does not have significant commercial purpose or character due to the small scale and size of this activity.

For the Commissioners discretion to be applied, your business needs to have moved past your preparatory stages. Since the activity you are undertaking is unable to be profitable in its current form, then you are not carrying on a business and the Commissioner cannot apply their discretion for non-commercial losses. However, you can defer your losses and offset against future profits from the business activity.

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