Edited version of private ruling

Authorisation Number: 1011650157399

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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)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your fruit growing activity in your calculation of taxable income for the 2009-10 and 2010-11 income years?

Yes, unless the Commissioner's discretion is not necessary because your activity makes a tax profit in the income year.

This ruling applies for the following periods

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

The scheme commenced on

1 June 2009

Relevant facts and circumstances

You purchased a property which was being used for used for another activity.

There were fruit bushes on the property.

You decided to commence a fruit growing activity a few years after purchasing the property.

The majority of the existing bushes were considered unviable due to lack of irrigation and damage caused by animals. These bushes were removed.

New bushes were planted in the 2003-04 and 2004-05 income years.

You have provided independent evidence stating it takes approximately three years for your fruit bushes to produce fruit and between seven and nine years for them to reach optimum yield.

A summary of your income and expenditure details from your business plan shows you anticipate first making a profit in the 2010-11 income year.

Your income for non-commercial loss purposes was more than $250,000 in the income year before you lodged this application for private ruling.

This ruling has been prepared on the basis that your activity is being conducted as a business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

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

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

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

Summary

Your business activity is of a type that requires a lead time before any assessable income is produced. You have shown that your activity will make a tax profit within a period that is commercially viable for the industry.

Therefore, the Commissioner will exercise the discretion to allow you to include any losses from your fruit growing business activity in your calculation of taxable income for the 2009-10 and 2010-11 income years.

Detailed reasoning

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as either a sole trader or a partner in a partnership and made a loss from that business activity.

Section 35-10 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 your taxable income calculation.

You satisfy the income requirements under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is above $250,000.

If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses if your business activity is of a type that requires a lead time before any assessable income is produced, for example, a forestry activity.

In order to exercise the discretion, the Commissioner must be satisfied 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 commercially viable period.

You purchased a property which contained fruit bushes. At the time of purchase the property was being used for another activity. A few years later, you decided to commence growing fruit on a commercial basis. The majority of the existing bushes were removed as they were unviable. You planted replacement bushes.

The Commissioner accepts that, whilst your property contained fruit bushes when you purchased it, you did not commence growing fruit until the 2003-04 income year. This is because the property was not being used for fruit growing when you purchased it and you have removed the existing bushes and replaced them.

You have provided a business plan providing your actual and expected income and expenditure. The plan shows you anticipate a profit will be made in the 2010-11 income year.

It is accepted that ten years is a commercially viable period for a commercial fruit growing activity. The ten years comprise the nine years lead time where the bushes are either producing no fruit or less than the industry standard for a commercial yield plus one year tolerance as per Taxation Ruling TR 2007/6.

You do not meet the income requirement as your income for non-commercial purposes is above $250,000. However, you have shown 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 this industry.

Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income.

Please note that the discretion will not apply in any year that you make a profit from this activity.