Edited version of private ruling

Authorisation Number: 1011655176845

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Ruling

Subject: Commissioner's discretion

1. 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 farming A enterprise in the calculation of your taxable income for the 2009-10 income year?

Yes.

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 farming A enterprise in the calculation of your taxable income for the 2010-11 to 2012-14 income years?

No.

3. 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 farming B enterprise in the calculation of your taxable income for the 2009-10 to 2012-13 income years?

Yes.

4. 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 farming B enterprise in the calculation of your taxable income for the 2013-14 income year?

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts

You commenced your farming A enterprise in the 2006-07 income year.

When the property was purchased, it was in a run down condition and you have applied significant resources towards improving the property.

You commenced your farming B enterprise in the 2009-10 income year.

The industry body of the farming B enterprise suggests that that this type of enterprise will not be commercially viable for four to five years.

Your adjusted taxable income in the 2009-10 income year was greater than $250,000.

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 the 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, the income requirement has not been satisfied as your income, for non-commercial loss purposes, is above $250,000.

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 commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997).

For the Commissioner to exercise the 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.

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

In your case, your farming A and your farming B activities are conducted on the same property. The assets used in each activity would, for the most part, be different, however, there would be some equipment that could be utilised in both activities. The goods produced in each activity are vastly different and service vastly different markets. The activities are not interdependent and any commercial links would be incidental.

Based on the facts and the overall impression, your farming A and your farming B activities are considered to be two separate business activities and Division 35 of the ITAA 1997 will be applied to each business activity separately.

Farming A enterprise

You commenced your farming A enterprise in the 2006-07 income year. When you purchased the property, it was in a run down condition and you have since applied significant resources towards improving the property.

You have not provided any independent evidence to establish the commercially viable period for this type of business. However, the commercially viable period for a farming A enterprise is generally two to three years. Based on this, your farming A activities should become commercially viable in the 2010-11 income year.

You have indicated that you believe your farming A enterprise will not produce income greater than deductions attributable to it until the 2013-14 income year. This will be eight years after your business began and outside the commercially viable period for this industry/business.

The reason your business activity will produce a loss is not due to the inherent nature of the business but is instead peculiar to your situation. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

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 farming A enterprise for the 2009-10 income year but will not exercise the discretion for the 2010-11 to 2013-14 income years.

Farming B enterprise

You commenced your farming B enterprise in the 2009-10 income year.

You have provided independent evidence from industry body of the farming B enterprise which suggests that that this type of enterprise will not be commercially viable for four to five years. Based on this, your farming B activities should become commercially viable in the 2013-14 or 2014-15 income years.

You have indicated that your farming B activities will become commercially viable in the 2013-14 income year. This is within the commercially viable period for this industry/business.

Therefore, the Commissioner will exercise the discretion available, in accordance with subsection 35-55(1) of the ITAA 1997 and paragraph 35-55(1)(c) of the ITAA 1997, in relation to your farming B enterprise for the 2009-10 to 2012-13 income years but will not exercise the discretion for the 2013-14 income year as you expect the activity to produce a profit by this time.