Edited version of private ruling

Authorisation Number: 1011513316714

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Ruling

Subject: Non-commercial losses - Commissioner's discretion - lead time

Question and answer

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 primary production activity in your calculation of taxable income for the years ending 30 June 20XX to 20YY?

Yes.

Relevant facts

In your application for a private ruling you have requested the Commissioner to exercise his discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to your primary production activity for the years ending 30 June 20XX to 20YY.

You operate a primary production activity at a given location. You commenced your activity in a past year. You have provided details of your activity.

You have also provided production projections for your activity based on different scenarios suggesting the activity will make a tax profit in a future year.

Independent evidence you have provided from various sources suggests that the production will increase over several years. The evidence also suggests the commercially viable period for the industry concerned.

Your activity has first met a test in a past year and will make a tax profit in a future year.

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 35-55

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.

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 reads:

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) 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 produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

Note:

Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any 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.

Your primary production activity has a lead time as required by the Note to paragraph 35-55(1)(c) of the ITAA 1997. Therefore the Commissioner can consider exercising his discretion.

In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 as your income for the purposes of paragraph 35-55(1)(c) of the ITAA 1997 is more than $250,000. Your primary production activity has not made a tax profit yet. Therefore you cannot claim the losses from your primary production activity unless the Commissioner exercises his discretion.

In order to exercise the discretion, the Commissioner must be satisfied that there is an objective expectation, 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 period that is commercially viable for the industry.

The evidence you have provided from independent sources shows the production will commence at a small scale in a future year and will gradually increase for a number of years afterwards. Independent evidence further demonstrates the commercially viable period for the relevant industry will be a certain number of years.

The Commissioner accepts that there is an objective expectation, based on evidence from independent sources that, within a period that is commercially viable for the industry concerned, your primary production activity will produce assessable income for an income year greater than the deductions attributable to it for that year.

As shown by your projected income and expenditure statement, your business activity will not produce income greater than deductions attributable to it until a future year within the commercially viable period for the industry. Therefore the Commissioner will exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in respect of your primary production activity for the years ending 30 June 2010 to 2014.