Edited version of private ruling

Authorisation Number: 1011645325874

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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 agricultural activity in your calculation of taxable income for the 2010-11 to 2020-21 income years, inclusive?

Answer

Yes.

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 agricultural activity in your calculation of taxable income for the 2021-22 to 2027-28 income years, inclusive?

Answer

No.

This ruling applies for the following period

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

1 July 2022 to 30 June 2023

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

1 July 2025 to 30 June 2026

1 July 2026 to 30 June 2027

1 July 2027 to 30 June 2028

The scheme commenced on

1 July 2010

Relevant facts and circumstances

During the 2010-11 income year you commenced an agricultural activity.

To date you have:

· undertaken soil tests

· located contractors to perform the preliminary work

· sourced seed stock.

Before planting the seedlings, you will:

· purchase a equipment

· perform preliminary work including clearing the land of existing trees and scrub and installing stock-proof fencing, and finalising the ordering of the seeds.

The seedlings will planted by the end of the 2010-11 income year.

You have provided a copy of your business plan and details of projected income and expenses for the 2010-11 to 2027-28 income years, inclusive.

Your income and expense projections show you will:

· incur a net loss in the 2010-11 to 2020-21 and 2022-23 to 2026-27 income years

· produce a positive net income in the 2021-22 and the 2027-28 income years

· have accumulated losses for the 2010-11 to 2020-21 income years, and

· have accumulated profits for the 2021-22 and subsequent income years.

You have provided independent information from a variety of on-line sources including growers' associations, growers, nurseries, a state government agricultural department, and Australian and overseas universities. These sources provide the following information:

· the first commercial harvest (cropping) will occur between eight and ten years after planting and can continue yearly, and

· in Australia, the industry is characterised by growers with less than 10 hectare plantations.

You do not expect to satisfy any of the non-commercial losses tests set out under Division 35 of the ITAA 1997 until the 2021-22 income year nor will any of the exceptions apply as your non-business activity income will exceed $40,000.

Your taxable income for non-commercial loss purposes will be less than $250,000 for each of the years concerned.

Your taxable income for non-commercial loss purposes was less than $250,000 in the income year before your Application for Private Ruling was lodged.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-55 and

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

Reasons for decision

Summary

For your type of agricultural activity, the lead time before one of the tests can be met or a profit can be made, is generally accepted by the industry as being ten years. Therefore, the Commissioner's discretion has been granted for the 2010-11 to 2020-21 income years, inclusive.

The Commissioner will not exercise the discretion for the 2021-22 to 2027-28 income years, inclusive, as the lead time for the activity has passed.

Detailed reasoning

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) 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.

You state that your agricultural activity is carried on as a business and this ruling is made on the basis of accepting this claim.

It is accepted that, due to 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 will not satisfy one of the tests until the 2021-22 income year.

The information you have provided demonstrates there is an objective expectation that your business activity will generate a tax profit in the 2021-22 income year, eleven years after planting the trees.

It is accepted that eleven years is a commercially viable period for your agricultural activity. The eleven years comprise the ten years lead time where the trees are growing plus one year tolerance as per Taxation Ruling TR 2007/6.

Therefore, the Commissioner's discretion has been granted for the 2010-11 to 2020-21 income years. This means that any loss for your activity can be taken into account in calculating your taxable income for that year, provided that the arrangement carried out does not materially differ from that described in this ruling.

The Commissioner will not exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2021-22 to 2027-28 income years, inclusive, as it is considered that the lead time for your agricultural activity will have passed. This means that any loss for your activity in this and subsequent income years will not be taken into account in calculating your taxable income for that years unless you can satisfy one of the four tests within Division 35 of the ITAA 1997, an exception applies or the Commissioner grants a further discretion.