Edited version of private ruling

Authorisation Number: 1011644559105

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

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

Question

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 primary production activity in your calculation of taxable income for the year ended 30 June 2010?

Answer

No

Ruling applies for:

the year ended 30 June 2010

Relevant facts

You operate a primary production activity that you commenced during the year ended 30 June 2010, on a small scale. Your activity consists of two inter-related activities.

You intend to commence production during the year ending 30 June 2011 and generate assessable income. You will use the proceeds from the sale to increase the scale of your activity. From 2012 onwards you expect to pass the assessable income test.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-1

Income Tax Assessment Act 1997 section 35-55

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

The Commissioner's discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised for one or more income years where because of its nature the activity has not met, or will not meet, one of the tests set out in Division 35 of the ITAA 1997 and there is an expectation that the business activity will either satisfy one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

As no test was satisfied for the year ended 30 June 2010 the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your primary production activity for that year, unless the Commissioner exercises the discretion under section 35-55 of the ITAA 1997.

It is in the relevant industry that there is a lead time before any assessable income is produced. This is due to the time it requires to accomplish certain processes before the final product is available for sale. These are innate or inherent features of relevant industry.

Your activity is a combination of two inter-related activities. As indicated from your income projections those activities can take different time periods before any assessable income can be produced. The lead time for a combined activity will be determined by the shorter of the two lead times to produce any assessable income. This is because as explained in the Note to paragraph 35-55(1)(b) of the ITAA 1997, lead time is between the commencement of the activity and the production of any assessable income.

In your case your activity is not expected to pass the assessable income test or any other test in the year ending 30 June 2011. As your primary production activity is not expected to pass a test within the lead time applicable to your combined activity, the Commissioner will not exercise his discretion in relation to your primary production activity for the year ended 30 June 2010.

The reason that your activity would not be able to pass the assessable income test in section 35-30 of the ITAA 1997 in the year ending 30 June 2011 is due to the small scale on which your business activity has commenced. We do not consider that there is anything inherent or innate in the nature of your business activity which means that it has not been able to satisfy one of the tests within the lead time.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the year ended 30 June 2010 because, on the facts provided the Commissioner is not satisfied that it is because of the nature of your primary production activity that it has not satisfied a test within the commercially viable period for the industry.

The rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any losses from your activity for the year ended 30 June 2010. A deferred loss is not disallowed and will be deductible against any taxation profit from your activity, or similar business activity, in future years.

If your activity, or similar activity should satisfy an exception or satisfy the income requirement and one of the tests in Division 35 of the ITAA 1997 in a future year, then the whole of the deferred loss will be deductible in that year.