Edited version of private ruling

Authorisation Number: 1011508705747

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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question:

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activity of farming in the calculation of your taxable income for 2008-09 and 2009-10 income years?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

You purchased a former crop farm.

When purchased, the farm was not under crop but was instead being used for animal/agistment by the previous owners.

You initially planted part of the land with mature plants, which yielding only X tonnes in the first year.

The proceeds of this crop were less than $20,000.

In the following year, you planted further crop which will not be harvested for a while. You expect the proceeds of this crop to result in a profit.

You intend to plant the final part of the farm's cropping land which will result in the farms total cropping land under the crop in just over a few years.

During this time, you have continued to incur expenses and the partnership's business activity of farming has an overall loss in both the 2008-09 and 2009-10 income years.

The partnership also conducts an unrelated non-primary production business. The net partnership income distributions from this activity exceed $40,000.

Reasons for decision

Carrying on a business

If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997. 

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators are described in Taxation Ruling TR 97/11.  

In your case, you have indicated in your application that your activity is carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on the business of farming during the 2008-09 and 2009-10 income years.

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 1 to 4. 

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 your activity 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 2008-09 and 2009-10 income years.

The information you have provided demonstrates that there is an objective expectation that your business activity will pass one of the tests (the assessable income test) and will produce a taxation profit by the 2010-11 income year, a few years after commencing your farming activities.

It is further accepted that meeting a test within a few years of commencing your farming activities will be within a commercially viable period for your industry.

Therefore, the Commissioner's discretion has been granted for the 2008-09 and 2009-10 income years.