Edited version of private advice

Authorisation Number: 1051784996599

Date of advice: 14 December 2020

Ruling

Subject: Commissioner's discretion for non-commercial business losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business activity in the calculation of your taxable income for the 20XX to 20XX income years?

Answer

Yes

This ruling applies for the following period:

Income years ending 30 June 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are establishing a primary production business activity.

You intend to sell the product to the local and export market.

You are a sole trader. You own the business and have overall responsibility for the project.

You have engaged an executive team based on their specific expertise to set up and run the business.

You have engaged the consulting services of an industry expert.

The nature of the business activity means that a number of years will pass between commencing the business activity and producing the product.

You have provided evidence supporting that X years is the accepted number of years before your activity becomes commercially viable.

You have provided the projected yield amounts of the product which have been supported by the industry expert.

Based on the projected yield amounts and expected sales prices for export sales and local sales, you expect to make a tax profit from the business in the 20XX income year (year X of the business).

Your income for the purposes of subsection 35-10(2E) of the Income Tax Assessment Act 1997 for the most recent income year ending before your application was made (i.e. the 20XX income year) is not less than $250,000.

Assumption

The exception in subsection 35-10(4) of the Income Tax Assessment Act 1997 will not apply to you in respect of any of the 20XX to 20XX income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(i)

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(ii)

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(iii)

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(iv)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for Decision

Summary

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 19971 to allow you to include any losses from your primary production business activity in the calculation of your taxable income for the 20XX to 20XX income years.

Detailed reasoning

Division 35 of the Income Tax Assessment Act 1997 applies to defer losses from non-commercial business activities unless:

•                     you meet the income requirement in subsection 35-10(2E) and you pass one of the four tests referred to in subparagraphs 35-10(1)(a)(i) to (iv);

•                     the exception in subsection 35-10(4) applies; or

•                     the Commissioner exercises his discretion under section 35-55 to not defer the losses (see subsection 35-10(1) and (2)).

You do not meet the income requirement as your income for the purposes of subsection 35-10(2E) for the most recent income year ending before your application was made is not less than $250,000, and the exception in subsection 35-10(4) does not apply to you (as assumed for the purposes of this ruling). Your business losses are therefore subject to the deferral rule under subsection 35-10(2) unless the Commissioner exercises his discretion.

Where you do not satisfy the income requirement in subsection 35-10(2E), paragraph 35-55(1)(c) provides that the discretion may be exercised for the income years in question where the Commissioner is satisfied that:

•                     it is because of its nature that your business activity will not produce assessable income greater than the deductions attributable to it; and

•                     there is an objective expectation, based on evidence from independent sources (where available), that your business activity will produce a tax profit within the commercially viable period for your industry.

Having regard to your circumstances and the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion, it is accepted that it is the nature of your business activity that will prevent you from making a tax profit in the 20XX to 20XX income years. It is also accepted that you are expected to produce a tax profit within the commercially viable period for your industry.

Consequently, the Commissioner will exercise his discretion under paragraph 35-55(1)(c) for the 20XX to 20XX income years if you incur a tax loss for those years from carrying on your primary production business activity. This means you will be able to offset that loss against your other assessable income.

1 All legislative references are to the Income Tax Assessment Act 1997.

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