Edited version of private ruling

Authorisation Number: 1011674532758

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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)(b) 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 income year?

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You purchased a property to carry on a primary production activity in partnership. The site has been previously used for a similar primary production activity.

Subsequent to the purchase of the property, a partnership was created to carry on the activity.

Although you commenced the activity in partnership, subsequently your business partner purchased your share and continued the activity as a sole trader. While the activity was carried on in partnership, all the incurred expenses were shared between the two partners.

Following the purchase of the property you prepared the site for the activity and commenced the business.

You prepared a business plan and according to the recommendation in the plan you prepared the income and expense statements.

You have stated that the lead time for the primary production activity is X years. You have provided independent evidence to confirm the lead time.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for the 2009-10 income year.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 section 35-30

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

Does PartIVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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

· one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met (along with the income requirement under subsection 35-10(2E) of the ITAA 1997), and/or

· if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

As your primary production activity has commenced, and is carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997.

Information provided with the application for this private ruling indicates that your activity is not able to satisfy one of the tests or produce a taxation profit, and is unlikely to do so in the 2009-10 income year. Therefore the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your primary production activity for the 2009-10 income year, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where income requirement in subsection 35-10(2E) of the ITAA 1997 is satisfied and:

I) the business activity has started to be carried on; and for those income years

II) because of its nature it has not met one of the tests set out in Division 35 of the ITAA 1997, and

III) there is an expectation that the business activity of an individual taxpayer will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

Information you have provided shows that you have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

Application of paragraph 35-55(1)(b) of the ITAA 1997 for the 2009-10 income year

Information you have provided indicates that you have gone past the preliminary stages and commenced the business activity.

It is in the nature of the primary production activity that there will be a lead time before a profit can be expected or one of the tests will be passed.

You have provided independent evidence to suggest that the commercially viable period for the industry is X years from the commencement.

The income and expense statements provided by you show that your activity will satisfy the assessable income test in section 35-30 of the ITAA 1997 and receive a profit in the year ended 30 June 200Z.

Therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for the 2009-10 income year.

Note 1

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the income year in question. That decision can only be made in issuing you your assessment, following lodgement of your income tax returns for the 2009-10 income year. You can lodge this return 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.

Note 2

At the time of disposing of the underlying land and trees to your business partner, CGT event A1 under section 104-10 of the ITAA 1997 would have occurred. The timing of the CGT event would have been at the time the contract to sell the assets had been entered into, or in the absence of any contract, when the change in ownership occurred. This could have implications for your income tax return for the year in question.

Summary of reasons for decision

The Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 in relation to your primary production activity for the relevant income year 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 nature of this activity, that it has not satisfied one of the tests set out in section 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and

· there is an objective expectation that this activity will meet the assessable income test set out in section 35-30 of the ITAA 1997 within the commercially viable period for the industry.