Edited version of private ruling

Authorisation Number: 1011674497567

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Ruling

Subject: Non Commercial Losses- Commissioner's discretion - Lead time.

Question

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 2009-10 and 2010-11 income years?

Answer: Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2011

The scheme commenced on

1 July 2005

Relevant facts

You and your spouse purchased a property to conduct a primary production activity. Prior to moving to the new property you were carrying on a similar activity on a smaller property in another State.

Although the property was used for primary production for many years, it was in a very poor condition.

When the property was originally purchased you intended to continue the same activity, however you had to change the direction as you did not receive sufficient profits from the previous activity. The new activity commenced a couple of years later.

Huge capital investment and infrastructure was required to make the change.

The lead time for the new industry was X years.

You have provided:

· income and expense statements

· trading accounts

· independent evidence of special circumstances; and

· a copy of a newspaper article with regards to the special circumstances.

You have stated that if the special circumstances did not affect the business activity, the business would have been profitable in the 2009-10 and 2010-11 income years. However, with changes to the special circumstances you now expect to generate profits in the 2011-12 income year.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) and 35-55(1)(c) of the ITAA 1997 for the 2009-10 and 2010-11 income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-0(2E)

Income Tax Assessment Act 1997 section 35-30

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 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 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 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 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, 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

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain 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.

In your case you have stated that you have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997 and do not expect to satisfy it in the 2009-10 and 2010-11 income years.

Your primary production activity will only be potentially subject to these provisions if it is carried on as a business. You have stated that your primary production activity is carried on as a business and this ruling is made on the basis of accepting this claim.

Application of paragraph 35-55(1)(a) and 35-55(1)(c) of the ITAA 1997

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

The Commissioner's discretion in subsection 35-55(1) of the ITAA 1997 reads -

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

The Note to paragraph 35-55(1)(c) of the ITAA 1997 states that the particular paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income.

Your primary production activity commenced in the 2005-06 income year.

The Commissioner accepts that the primary production activity has a lead time between the commencement and producing any assessable income.

Paragraph 21 of the Taxation Ruling TR 2007/6 states that the period that is commercially viable for the industry concerned is the period in which it is expected that any business activity of that type, which is carried on in a commercially viable manner, would be expected to satisfy one of the tests in Division 35 of the ITAA or produce a tax profit.

Although you have not provided independent evidence to suggest a lead time, you have stated that the commercially viable period is X years.

You have also stated that the special circumstances affected your business activity, hence the number of years before the activity becomes commercially viable should be extended.

You have provided evidence of the special circumstances.

Based on the information provided, the Commissioner accepts that the special circumstances affected your primary production activity.

Paragraph 51 of the Taxation ruling TR 2007/6 states that in some situations the special circumstances may extend the time within which that particular business activity could objectively be expected to pass a test, and the Commissioner could exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

Paragraph 52 states that the discretion can be exercised in income years after the one in which the special circumstances have occurred if the effects of those special circumstances on a business activity continue such that it cannot satisfy any of the tests in those later years.

You have stated that the primary production activity is expected to generate profits in the 2011-12 income year.

Accordingly, it would not be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your primary production activity for the 2009-10 and 2010-11 income years.

In view of the above, the discretion under paragraph 35-55(1)(a) will be exercised for the 2009-10 and 2010-11 income years so that losses made in those years need not be deferred.

Note

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) that the loss deferral rule in subsection 35-10(2) does not apply to you for the income years in question. That decision can only be made in issuing you your assessments, following lodgement of your income tax returns for the relevant income years, being that for the income years ending 30 June 2010 and 30 June 2011. You can lodge these returns on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

Summary of reasons for decision

The Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 in relation to your primary production activity for the 2009-10 and 2010-11 income years on the basis that, from the evidence you have provided:

· your business activity is carried on by you as a business;

· you had actually commenced this business activity;

· it is because of the special circumstances that the primary production activity did not generate a profit within the commercially viable period for the industry; and

there is an objective expectation that the primary production activity will meet the assessable income test set out in section 35-30 of the ITAA 1997 and generate a profit X years after the commercially viable period for the industry