Edited version of private ruling

Authorisation Number: 1011650830535

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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)(a) 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 relevant financial year?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the relevant financial year?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2007

Relevant Facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your Private Ruling application

· independent reports relating to recent trends in the cattle industry

· your business plan

· profit and loss statements for relevant financial years and projected income details.

You purchased a grazing property and commenced a business of cattle grazing in partnership in that year.

You state that, due to drought conditions, the partnership sold all the cattle.

Due to personal circumstances, you took over the financial and operational control of the property. Subsequently, you operated the business as a sole trader.

Your intention is to breed, raise and sell beef cattle.

You state that over the past seven years, you have endured drought conditions and adverse seasonal conditions.

You have provided a copy of your business plan.

You purchased your first stock as a sole trader in the relevant financial year.

You purchased further cattle.

This stock is currently on hand.

You expect to sell your first cattle as a sole trader in the future financial year and, pending weather conditions, additional cattle will be bought to bring the farm to capacity.

You have provided the stock movement projections for the relevant to future financial years.

You state that the property is also used for agistment, however only in a minor way during the drought periods.

You have provided copies of documentation from the Australian Bureau of Agriculture and Resources Economics (ABARE) as independent evidence supporting your claim that drought conditions applied.

Your business plan provides projected income and expenses for the relevant to future financial years, showing your expectation that the business will become profitable in approximately 4 years from purchase of your first cattle.

You expect to turn off X head of cattle per year.

You state that you will be primarily responsible for the running of the business.

You have over 30 years of farming experience.

Your adjusted taxable income for non-commercial loss purposes is more than $250,000 in the relevant financial year.

Reasons for decision

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 your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

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

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the relevant financial year and you expect this will be the case in the relevant financial year as well.

In order to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the relevant financial year, the Commissioner must be satisfied that special circumstances applied and that your business activity would have produced a profit in the year in question, but for the special circumstances.

In your case, you have not demonstrated this for the relevant financial year.

Alternatively, in order to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997, 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.

For the Commissioner to exercise this discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

In your projected profit and loss statement, you have shown that your business activity will produce income greater than deductions attributable to it in the 2013-14 financial year or four years after the activity commenced.

Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater that the expenses attributed to it.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your cattle farming for the relevant financial year.