Edited version of private ruling

Authorisation Number: 1011624845802

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Ruling

Subject: non-commercial losses - Commissioner's discretion - lead time

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

Yes.

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

Relevant facts

The business activity commenced in the 2009-10 income year.

The establishment schedule is 1500 items in the 2010 year and 1500 in the 2012 year.

You meet the income requirement test for non-commercial losses.

You cannot pass any of the four tests in this initial period.

You have provided a business plan covering all aspects of the business. Your projected figures indicate that you will pass the assessable income test in year five.

Independent evidence from the industry indicates that the commercially viable period for this industry will be five years from the time of establishment at which time the first commercial harvest is expected.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Subsection 35-10(2)

Income Tax Assessment Act 1997 Subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision

Summary

The Commissioner will exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 to allow the losses from your business activity for the 2009-10 to 2012-13 income years. You are considered to be carrying on a business. You meet the income requirement of subsection 35-10(2E) of the ITAA 1997; the nature of the activity is one where a lead time exists before assessable income can be derived; and there is a reasonable expectation that the assessable income test will be passed within the commercially viable period (five years).

Detailed reasoning

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but… not… occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors that are considered important in determining the question of business activity. They are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation, or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Based on the information you have provided the overall impression is that you will be carrying on a business. You have provided a comprehensive business plan which shows the research that you have undertaken - the activities that will be undertaken to establish 3,000 items, the continuing maintenance and processes, a marketing plan, the management experience available and forecast Profit and Loss Statement and Balance Sheet.

The Commissioner's discretion - lead time

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where:

(i) the business activity has started to be carried on and for that or those income years

(ii) because of its nature it has not satisfied, or will not satisfy, one of the tests set out in Division 35 of the ITAA 1997, and

(iii) there is an expectation that the business activity of an individual taxpayer will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

Based on the information you have supplied your activity has gone beyond any preliminary activities and can be said to have commenced as a business activity in the 2009-10 income year, when you established.

It is accepted that it is in the nature of your activity there will be a lead time before a profit can be expected or, one of the tests passed. For this reason, your activity has not previously satisfied one of the tests and will not satisfy one of the tests in the 2009-10 to the 2012-13 income years.

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) by the 2013-14 income year, five years after planting your plants.

The independent evidence suggests that the commercially viable period for the industry will be four to five years from the time of planting. In your case, it is reasonable to accept that meeting a test within five years after planting your plants will be within a commercially viable period for your industry.

Therefore, the Commissioner's discretion has been granted for the 2009-10 to the 2012-13 income years.