Edited version of private ruling

Authorisation Number: 1011627979678

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Ruling

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

Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your primary production activity in the calculation of your taxable income for the 2009-10 income year?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2007

Relevant facts

You purchased a property in 2006.

The main focus of the operation is cattle breeding as well as various other cattle and sheep fattening and agistment enterprises depending on the season. Crops are also produced.

The property has suffered from drought in the past few years with reduced yields of both crops and pastures. Crops have often failed due to the harsh climatic events and have been made into hay for the cattle or harvested at vastly reduced yields.

Rainfall records have been provided.

You have had an "Economic Feasibility Report" prepared by an expert in this area. It is proposed to follow his cattle production and cropping plan to turn the property into a profitable enterprise.

A copy of the report has been provided.

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

Relevant legislative provisions

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)(a)

Income Tax Assessment Act 1997 Subsection 35-55(1)(c)

Reasons for decision

Summary

The Commissioner will exercise the discretion to allow you to include any losses from your cattle breeding business activity in your calculation of taxable income for the 2009-10 income year. It is in the nature of a cattle breeding activity that there is a lead time before assessable income can be produced and you have shown that there is a reasonable expectation of making a profit within the commercially viable period for the industry.

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 the calculation of taxable income. The 'income requirement' is set out in subsection 35-10(2E) of the ITAA 1997. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 reads -

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

Note:

Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

Your cattle breeding activity has a lead time between the commencement and producing of saleable offspring as required by the Note to paragraph 35-55(1)(c) of the ITAA 1997. Therefore, the Commissioner can consider exercising his discretion.

In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 as your income for the purposes of paragraph 35-55(1)(c) of the ITAA 1997 is more than $250,000. Your cattle breeding activity has not made a tax profit yet. Therefore, you cannot claim the losses from your cattle breeding activity unless the Commissioner exercises his discretion.

In order to exercise the discretion, the Commissioner must be satisfied that 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 period that is commercially viable for the industry.

The lead time period begins from the commencement of the activity and includes the time to raise or acquire females of a breeding age, a period for mating these females, allowing for the gestation period of nine months and finishes when the progeny have reached saleable age. Based on the facts that you have acquired females ready to breed from and that you intend to turn the cattle off as yearlings, the period for a typical business activity of breeding and selling cattle to become commercially viable is no greater than three years.

You have indicated that in the first two years after purchasing the property there were very dry conditions. In the first year there was only XXXXmm of rain (average YYY mm) and you had a small number of cattle on agistment and planted a crop which failed. The second year was relatively dry, you planted crops but these failed to reach maturity and were used as fodder. A significant number of steers were purchased and sold in the year.

The breeding activity commenced in the third year (2008-09) with the purchase of breeder cattle. You have provided forecast figures to show that you expect to make a profit in the 2010-11 income year, the third year after the commencement of the breeding activity.

The Commissioner accepts that there is an objective expectation, based on evidence from independent sources that, within a period that is commercially viable for the industry concerned, your cattle breeding activity will produce assessable income for an income year greater than the deductions attributable to it for that year.

Therefore the Commissioner will exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in respect of your cattle breeding activity for the year ended 30 June 2010.