Edited version of private ruling

Authorisation Number: 1011521239524

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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question 1

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 farming 1 enterprise in your calculation of taxable income for the 2009-10 to 2012-13 income years?

Answer: No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your farming 2 enterprise in your calculation of taxable income for the 2009-10 to 2012-13 income years?

Answer: No.

Question 3

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your investment enterprise in your calculation of taxable income for the 2009-10 income year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

Your assessable income for non commercial loss purposes for the income years 2009-10 to 2012-13 will be more than $250,000.

Question 1

You commenced your farming 1 enterprise in 200X.

This enterprise will met at least one of the four non-commercial loss tests in the 2009-10 to 2012-13 income years.

You are seeking the Commissioner's discretion for the 2009-10 to 2012-13 income years in relation to this enterprise.

Farming 2 enterprise

Your farming 2 enterprise is located on the same property as your farming 1 enterprise.

Your farming 2 enterprise first produced saleable products in 200Y.

When considered on its own, your farming 2 enterprise is currently producing assessable income greater than available deductions.

You are seeking the Commissioner's discretion for the 2009-10 to 2012-13 income years in relation to this enterprise.

Investment enterprise

Your investment in this enterprise commenced in the relevant year and consists of more than one unit.

You are seeking the Commissioner's discretion for the 2009-10 income year in relation to this enterprise.

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 your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non commercial loss purposes is above $250,000.

In order to exercise the discretion, the Commissioner must be satisfied 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 commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997).

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each of activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

In your case, your farming 1 and your farming 2 enterprises are conducted on the same property. The assets used in each activity would, for the most part, be different; however, there would be some equipment that could be utilised in both activities. The goods produced in each activity are vastly different and service vastly different markets. The activities are not interdependent and any commercial links would be incidental.

Based on the facts and the overall impression, your farming 1 and your farming 2 enterprises are considered to be two separate business activities and Division 35 of the ITAA 1997 will be applied to each business activity separately.

Farming 1 enterprise

You commenced your farming 1 enterprise in 200X. The independent evidence you have provided states that you are a successful and acknowledged producer who consistently attracts a premium price for your goods. It also states that you are known for running a very efficient farming program.

You have not provided any independent evidence to establish the commercially viable period for this type of business. However, the commercially viable period for this type of farming enterprise is generally a few years.

You have indicated that you believe your farming 1 enterprise will not produce income greater than deductions attributable to it until the 2013-14 income year. This is X years after your business began and outside the commercially viable period for this industry/business. The reason your business activity is currently producing a loss is not due to the inherent nature of the business but is instead peculiar to your situation. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

Therefore the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your farming 1 enterprise.

Farming 2 enterprise

You commenced your farming 2 enterprise in 200Y. The independent evidence you have provided states that your enterprise produces a high quality premium product. It also states that there is a niche market for your product and this should ensure your business is run in a profitable manner in the future.

You have not provided any independent evidence to establish the commercially viable period for this type of business. However, various tax office product rulings for managed investment schemes have accepted anywhere from four to eight years as commercially viable lead times for this type of activity. Therefore the commercially viable period for your enterprise could be up to eight years. Your farming 2 enterprise has now been operating for more than eight years.

You have stated that your farming 2 enterprise is currently producing assessable income greater than available deductions and it is only when your farming 1 and farming 2 enterprises are incorporated that a net loss arises. As already discussed above, your farming 1 and farming 2 enterprises are considered to be two separate business activities, therefore, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

Under Division 35 of the ITAA 1997, the Commissioner's discretion can only be exercised where a taxpayer is seeking to claim losses from that particular business activity against their other income. As your farming 2 enterprise is currently producing a profit, the Commissioner's discretion is not available.

Investment enterprise

You commenced your investment enterprise in the relevant year. This investment is covered by a Product Ruling which discusses the application of Division 35 of the ITAA 1997 to this investment product.

As already discussed above, the Commissioner must be satisfied 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 commercially viable period. Pursuant to the applicable Product Ruling, the Commissioner has already exercised his discretion (in subsection 35-55(2) of the ITAA 1997) up to and including the 2008-09 income year for your investment enterprise. In the absence of any special circumstances affecting this enterprise, the Commissioner is unable to exercise his discretion beyond that already allowed.

Therefore the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to this enterprise.