Edited version of private ruling

Authorisation Number: 1011608942059

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Ruling

Subject: non - commercial losses - Commissioner's discretion

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

No.

This ruling applies for the following period

1 July 2009 to 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

The following description of the scheme is based on information provided by you and your private ruling application.

You do not pass the income requirement for the 2009-10 income year.

Your primary production activity commenced in 1999. The commercially viable period for your activity is considered to be six to eight years.

There have been two phases of planting. The first phase of planting commenced in 1999 and continued until 2007. The second phase of planting commenced in 2006 and continued until the end of the 2007-08 financial year.

Development of the plants has been slow and results have been significantly affected by the following-:

• slower than expected output from the seedlings planted in the nursery

• irrigation inputs

• failure of the plants to thrive initially after planting in the orchards

• fertilizer inputs not matching the nutrient demand required to produce a large crop

• poor quality of product as a result of irrigation and water issues and fertilizer problems.

Your income for non-commercial loss purposes is above $250,000.

Detailed reasoning

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 a discretion to allow the inclusion of the losses.

The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied 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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

The Australian Taxation Office considers the lead time - commercial viable period for your industry is six to eight years. In your case, as you commenced business in 1999, your commercial viable period would have extended to 2007.

In your projected income and expenditure statement you have projected that your business activity will not produce income greater than deductions attributable to it until the 2013 -14 income year. This is due to slower than expected output from the seedlings planted in the nursery prior to planting, irrigation inputs, failure of trees to thrive initially after planting, fertilizer inputs not matching the nutrient demand required to produce a large crop and poor quality product as a result of irrigation and water issues and fertilizer problems.

Where the business does not produce a profit within the commercially viable period and also, where the reason for not making a profit within a commercial viable period is not an inherent factor of the business, the Commissioner is not able to exercise the discretion. In your circumstances, the lead time of six to eight years has passed and the problems associated with the activity as described above are not considered to be inherent factors of your primary production industry.

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.