Edited version of private ruling

Authorisation Number: 1011621838716

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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)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your fruit tree growing activity in your calculation of taxable income for the 2009-10 income year?

Answer

No.

Question 2

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

Answer

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You will operate a primary production activity on land you have purchased.

In the twelve months that you have owned the land you have completed 90 per cent of the preparation required prior to commencement of the tree growing activity. You have constructed dams, continued to fence the property, bought and erected cattle yards, purchased some cattle and bred 4 calves, cleared 5 acres for fruit trees and purchased the necessary pump and irrigation equipment. You also have trees in a nursery awaiting payment before being released to you.

Your assessable income for the 2009-10 income year was greater than $40,000

You satisfied the income requirement under subsection 35-10(2E) of the ITAA 1997 in the 2009-10 income year.

Reasons for decision

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 and your fruit tree growing activities 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 and your fruit tree growing activities are considered to be two separate business activities and Division 35 of the ITAA 1997 will be applied to each business activity separately.

Fruit tree growing activity

Generally, the expenses connected with the acquisition, establishment and enlargement of a business or with the acquisition of fixed capital assets are not deductible under section 8-1 of the ITAA 1997.

The cost of acquiring a business is not considered as a cost of carrying on the business for the purpose of gaining or producing assessable income, unless it is an operating expense.

This is supported by the comments of Menzies J in John Fairfax & Sons Pty Ltd v. Federal Commissioner of Taxation (1959) 101 CLR 30; (1959) 11 ATD 510; (1959) 7 AITR 346:

To make a payment to acquire or to defend the acquisition of a favourable position from which to earn income or to enter into arrangements that will yield income is not in general an outlay incurred either in gaining or in carrying on business for the purpose of gaining assessable income; such a payment in the case of a trading company, occurs at a stage too remote from the receipt of income to be so regarded. To be deductible an outlay must be part of the cost of trading operations to produce income, i.e., it must have the character of a working expense.

The expenses associated with the establishment or purchase of a business, are incurred at a point too soon to be regarded as being incurred in carrying on the business.

Three indicators that must be present before a business can be said to have commenced. These are:

· purpose, intention and decision

· acquisition of a business structure, and

· actual commencement of business operations.

Purpose, intention and decision

The events leading to the commencement or start-up of a business activity often begins with a mere intention to establish the business activity. This is developed by researching the proposed business and, in some instances, by experiment. The process culminates in a final decision on whether to commence business. However, not all businesses commence in such an orderly manner.

Business structure

Most business activities have a structure that provides the framework of the business. It is usually a collection of capital assets. The particular capital assets will depend on the particular business activity.

For a business activity to commence, an appropriate business structure should be in place. The actual structure adopted is a question of fact and degree that depends on the nature of the business activity. 

Commencement of Business Operations

As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. 

Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention.  It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

For example, if your business activity is a primary production activity, involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as a trading activity, the business would generally be considered to commence once you began conducting the services for a fee.

The expenses associated with the establishment of a business are not deductible under section 8-1 of the ITAA 1997. The expenses are incurred at a point too soon. They are not regarded as being incurred in carrying on the business (FC of T v Maddalena (1971) 2 ATR 541; 71 ATC 4161).

In your case all costs are incurred at a point too soon to be regarded as being incurred in carrying on the business.

Division 35 of the ITAA 1997 discusses the deferral of losses from non-commercial business activities. As your losses are incurred at a point too soon to be regarded as being incurred in carrying on the business the discretion available in paragraph 35-55(1)(b) is not applicable to your situation.

Farming activity

You commenced your farming enterprise in 2009-10 income year. You have not provided any independent evidence to establish the commercially viable period for this type of business. However, the commercially viable period for the farming industry begins at the start of the activity until the time taken to raise the animal to a saleable age. The commercially viable period for this type of farming is generally 1 to 2 years.

You have indicated that you believe your farming enterprise will not produce income greater than deductions attributable to it until the 2010-11income year. This is 2 years after your business began and within the commercially viable period for this industry. The reason your business activity is currently producing a loss is due to the inherent nature of the business therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your farming activity in your calculation of taxable income for the 2009-10 income year.