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Edited version of private ruling
Authorisation Number: 1011471668382
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Ruling
Subject: Non Commercial Losses
Question
Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in your calculation of taxable income for income year X?
Answer
Yes.
This ruling applies for the following period:
1 July 2009 to 30 June 2010
The scheme commenced on:
1 July 2008
Relevant facts and circumstances
The following documents you provided form part of the scheme under consideration:
· Your Private Ruling application.
· Income projections for your business activity
You commenced your business activity in income year Y on a number of acres property.
You have stated that when you purchased the property it was previously with the same business activity.
Although you have commenced your activity in year Y, the previous owner will retained the proceeds in income year X from this business.
From your business activity the relevant season proceeds belonged to you. Most of the input costs for the year W business will be incurred in income year X with most or all the income being received in income year W.
According to the income projections you have provided, you expect to make a profit from your business activity in income year W.
The evidence from the independent source states that the crop grows for 12 to 16 months before being harvested between June and December each year.
You have stated that for the crop to grow and for it to be harvested the accepted number of years before an activity becomes commercially viable is two years in the crop industry.
Your income from other sources exceeds $250,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 35-1
Income Tax Assessment Act 1997 subsection 35-10(2E)
Income Tax Assessment Act 1997 section 35-30
Income Tax Assessment Act 1997 section 35-55
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)
Reasons for decision
Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in the calculation of taxable income. The 'income requirement' is set out in subsection 35-10(2E) of the ITAA 1997. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.
In order to exercise the discretion, the Commissioner must be satisfied, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.
In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 as your income for non- commercial loss purposes is above $250,000. However, your income projection shows that your business activity will produce assessable income greater than the deductions attributable to it in income year W, in the second year of the commencement of your activity. Although you have commenced your activity in year W, the previous owner will retained the proceeds in income year X from this business. Therefore your activity is considered to have commenced in income year Y. Your commercial viability period commences from that year.
The information from independent sources shows that it is reasonable to accept the period that is commercially viable for your business industry to be 2 years. Your activity is expected to return an income in income year W and there by satisfy the assessable income test in section 35-30 of the ITAA 1997. Your activity will make a tax profit in the same year. The Commissioner accepts that making a tax profit in the second year of commencement of your activity will be within the commercially viable period for your business industry.
Therefore, the Commissioner will exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for income year X. This would mean that the losses from your business activity can be included in the calculation of your taxable income for that income year.