Edited version of private ruling

Authorisation Number: 1011674509357

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Ruling

Subject: Non-commercial losses

Question

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 primary production activity in your calculation of taxable income for the 2009-10 to 2014-15 years of income?

Answer

No.

This ruling applies for the following period

Financial year ended 30 June 2010

Financial year ended 30 June 2011

Financial year ended 30 June 2012

Financial year ended 30 June 2013

Financial year ended 30 June 2014

Financial year ended 30 June 2015

The scheme commenced on

1 July 19XX

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below.

Since commencing the business of cattle grazing some decades ago you have purchased additional land when available.

You now own and operate beef cattle breeding and fattening business with a total area of approximately 2,000 hectares.

You have incurred substantial debt to complete those purchases leading to higher, sustained interest costs. The additional land must be developed, this includes fencing, construction of yards, extensive clearing of regrowth and pasture development. You adopted a breeding up program to maintain and improve the quality of the breeding herd, resulting in depressed profitability with the retention of all females to enlarge the breeding herd.

The drought which consumed much of the last decade affected your business in a number of ways;

· Carving and branding rates were significantly depressed, and progressively worsened as the drought persisted, to the point where the decision was taken to substantially reduce the breeding herd on one of the properties and to focus that activity on the other property.

· Insufficient numbers of replacement heifers meant that older, less productive cows were retained and because all heifers were put into the breeding herd regardless of their standard, the quality of the breeding herd progressively deteriorated. That is now being addressed.

· Steers which were turned off as weaners showed the effects of drought in their condition and were generally of poorer quality. They were sold into a market which was limited by the drought conditions, leading to depressed prices.

· Expenses increased with additional purchases of fodder and grains.

· The three members of the full time workforce at that time could not be effectively deployed in advancing the development of the business because they were required to attend to drought-related tasks such as additional feeding of cattle, more frequent movements of cattle from paddock to paddock to make use of the available feed, pumping limited ground water for stock use and inspection of dams for bogged cattle.

Your current level of interest charges, while above average, reflects recent purchases requiring borrowing which have not yet been paid down.

Your income tax returns since the 1999-2000 financial year have shown losses and projected returns to the 2014-15 financial year also show that losses are expected.

You have invested in new infrastructure and machinery to boost productivity.

You have sought to expand your business in order to achieve economies of scale to assist in offsetting the declining terms of trade of the beef industry. Such expansion efforts have impeded the business from returning book profits, primarily due to the need to retain large numbers of female progeny in order to continually expand the herd, thereby making them unavailable for sale. Furthermore, in recent years a long and protracted period of severe drought conditions has resulted in a reduction in cattle growth and pregnancy rates as well an increase in costs due to the need for additional feed supplements. As a result the productivity and efficiency of the business has been impacted, further compromising financial performance.

The business currently joins the several hundred female cattle annually with progeny regularly classified in accordance with the industry classification system. The herd is run as a sell replacing breeding herd whereby some female progeny are annually selected and retained to replace those older females which have been culled for age or infertility. This process along with the regular introduction of new genetics through bull purchases, secures the continued genetic improvement of the herd. The surplus females and male progeny are grown and finished on a grassed basis, with the aid of protein supplementation and fodder crops when the appropriate opportunity arises.

The marketing of sale cattle is undertaken with the assistance of a local stock agent. Local saleyards as well as direct to rneatworks consignments for suitable cattle are the usual marketing methods adopted.

Labour is provided by you and your adult children, one full time employee and contractors as required.

The independent evidence you provided expresses the belief that the commercially viable period for the beef cattle industry, is three to six years. The report predicts your business will attain a tax profit in six years commencing from the 2010-11 year of income.

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

Relevant legislative provisions

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

Reasons for decision

Division 35 of the ITAA 1997 applies to prevent losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred.

Under the measures the losses that cannot be offset against other income in the year in which they arise may be carried forward to be offset in a future year when there is a profit from the non-commercial activity (or against other income if certain criteria are satisfied or the Commissioner exercises his discretion).

You have asked for the Commissioner's discretion to be applied to your circumstances.

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.

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 referred to the paragraph being intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. It provides the example of the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. 

The income requirements under subsection 35-10(2E) of the ITAA 1997 are satisfied 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.

From industry sources such as Meat & Livestock Australia, the Australian Taxation Office considers the lead time for cattle growing to be two to three years. This satisfies subparagraph 35-55(1)(c)(i) of the ITAA 1997 regarding the phrase 'because of its nature'

To satisfy subparagraph 35-55(1)(c)(ii) of the ITAA 1997 a tax profit is required to be made in a commercially viable period. Your independent industry evidence concludes that a three to six year period would be sufficient for a farm business to return a profit. The report projects a profit being made in the 2015-16 year of income which is within a six year period commencing in the 2010 -11 year of income.

You bought your first property some decades ago and commenced your business of cattle breeding and fattening. The report concludes that the commercial viable period for the beef cattle industry is three to six years, therefore you would have been expected to return a profit in a particular year during the 1990s. Your profit projection doesn't indicate a profit will be made before another 22 years has passed with a profit posted in the 2015-16 year of income.

Where the business does not produce a profit within the commercially viable period and also, where the reason for not making a profit within a commercial viable period is not an inherent factor of the business, the Commissioner is not able to exercise the discretion. In your circumstances the commercially viable period of three to six years, as indicated by the independent financial projection report, has passed and therefore the circumstances as described above are not considered to be inherent factors of the cattle farming industry.

The Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997.