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Edited version of private ruling
Authorisation Number: 1011596805009
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Ruling
Subject: Non commercial losses; Lead Time
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 activity in your calculation of taxable income for the 2009-10 to 2012-13 income years?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
May 1997
Relevant facts and circumstances
You are carrying on a primary production business which commenced several years ago.
You have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997 for the 2008-09 income year.
You do not expect to generate assessable income greater than the deductions attributable to it (taxation profit) in the 2009-10 to 2012-13 income years. Your business activity will generate a taxation profit in the 2013-14 income year.
Lead Time
You believe that the commercially viable period for the activity is 10 to 15 years.
You have submitted independent evidences on the activity you are carrying on.
You advise that you have met three of the four tests under Division 35 in previous years.
As you expect to increase the sales and decrease your expenses in the future and generate a profit in the 2013-14 income year, you have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(c) for the 2009-10 to 2012-13 income years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 35-10(2)
Income Tax Assessment Act 1997 Subsection 35-10(4)
Income Tax Assessment Act 1997 Section 35-30
Income Tax Assessment Act 1997 Section 35-35
Income Tax Assessment Act 1997 Section 35-40
Income Tax Assessment Act 1997 Section 35-45
Income Tax Assessment Act 1997 Section 35-55(1) (c)
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.
If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.
For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.
Reasons for decision
Commissioner's discretion for the 2009-10 to 2012-13 income years
You have requested that the Commissioner's discretion be applied in terms of paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to 2012-13 income years.
You state that your activity is carried on as a business and this ruling is made on the basis of accepting this claim.
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.
In your case, you do not meet the income requirement in the 2008-09 year (most recent income year) as your income for non-commercial loss purposes is above $250,000.
For the Commissioner to exercise the discretion you must be able to show that the reason your business activity has failed to make a profit is inherent to the nature of the business and is not peculiar to your situation.
The Commissioner must be satisfied, based on evidence from independent sources, that your business activity will produce a taxation profit within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997).
The 'period that is commercially viable for the industry concerned'
Paragraph 20 of TR 2007/6
The period that is commercially viable for the industry concerned is the period in which it is expected that any business activity of that type, which is carried on in a commercially viable manner, would be expected to satisfy one of the tests or produce a tax profit. It is not determined having regard to best practice in the industry concerned
You have stated that the commercially viable period for your activity is ten to fifteen years.
The report from an independent source states "from year 13 the income remains the same until year 30".
Your activity commenced several years ago. You have planted your first lot of trees at that time. That means, your lead time concluded in Year 12.
As such, it is considered that your lead time has passed as the year ended 30 June 2010 is beyond Year 13 and the plants should be at maximum production.
You have estimated that your activity will return a profit in Year 17 which is outside the commercially viable period identified in the independent report.
As stated above, the commercially viable period is determined on an industry basis and not by commercial decisions and liabilities an individual business operator may make in regard to costs, financing, funding, cost efficiency, levels of debt, rates, depreciation, interest etc.
Based on the information provided, the Commissioner is satisfied that the commercially viable period for your activity has lapsed as the year 2010 will be your beyond your 13th year after commencement.
Therefore the Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to 2012-13 income years.