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Edited version of private ruling
Authorisation Number: 1011620182651
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Ruling
Subject: Non-commercial losses - Commissioner's discretion
Questions:
1. Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your plantation timber business in your calculation of taxable income for the 2008-09 to 2011-12 income years?
Answer: Yes.
2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include losses from your plantation timber business in your calculation of taxable income for the 2012-13 income year?
Answer: No
This ruling applies for the following period
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Relevant facts and circumstances
You commenced carrying on a primary production business of timber production in the 1998-99 income year, when you purchased two woodlots as part of a managed project.
You expect the trees to be harvested by 2013.
You expect to pass the assessable income test and make a profit from your activity in the 2012-13 income year.
Your timber growing activity will not satisfy any of the tests set out in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) of the ITAA 1997 for 2008-09 to 2011-12 income years.
The following documents form part of the scheme under consideration:
· Your Private Ruling application
· Independent evidence from an industry publication
· Income and expenditure projections for your business activity.
Your income for non-commercial loss purposes for the 2009-10 income years was less than $250,000.
Reasons for decision
Summary
We consider that the reason your activities are expected to produce losses in the 2008-09 to 2011-12 income years is because there is a lead time which is inherent to the nature of your business activities. Therefore, the Commissioner's discretion under paragraph 35-55(1)(b) has been granted for those years.
The Commissioner's discretion under paragraph 35-55(1)(b) will not be granted for the 2012-13 income year because you expect to meet a test or make a profit in that year.
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 discretion to allow the inclusion of the losses.
You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 as your income for non-commercial loss purposes is less than $250,000.
Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable to defer the loss.
It is accepted that it is in the nature of your activity that there will be a lead time before a profit can be expected or one of the tests passed. It is accepted that meeting a test within 10 to 15 years of planting your timber trees will be within a commercially viable period for your industry.
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) or will produce a taxation profit by the 2012-13 income year, 14 years after planting your timber trees.
Therefore, the Commissioner's discretion under paragraph 35-55(1)(b) has been granted for the 2008-09 to 2011-12 income years.