Edited version of private ruling

Authorisation Number: 1011687547549

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Ruling

Subject: Non Commercial Losses

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(b)(lead time) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your crop growing activity in the calculation of your taxable income for the 2008-09 and 2009-10 income years?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

10 July 2008

Relevant facts and circumstances

The arrangement that is the subject of the private 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

· Your business plan

· Information sheets from the relevant industry association.

You have a plantation on leased land.

Planting occurred in 2009. You use the services of local people to assist with land preparation, planting, maintenance and harvesting.

The plants will be first harvested in the third year of growth, but reach full production in the fourth year.

The business plan that you have supplied states that your activity will become profitable in the 2011 income year.

You earn over $40,000 a year from other sources.

Your income for non-commercial loss purposes does not exceed $250,000.

Reasons for decision

Summary

It is accepted that due to its nature, your crop growing activity did not satisfy one of the non-commercial loss tests for the 2008-09 and 2009-10 income years. Based on the information provided, it is also accepted that within a period that is commercially viable for the relevant industry, it is expected that you will meet the assessable income test. Therefore the Commissioner will exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include losses from your activity in the calculation of your taxable income for the 2008-09 and 2009-10 income years.

Detailed reasoning

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:

· you satisfy subsection (2E) (income requirement) and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is not met;

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

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

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one on the tests is passed (and subsection (2E) is met), the discretion is exercised, or the exception applies.

Tests

In broad terms, the tests require:

(a) at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)

(b) the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

(c) at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or

(d) at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

In addition to the above tests an income requirement must be met (subsection (2E)) for the 2009-10 year. You will satisfy that test for an income year if the sum of the following is less than $250,000:

(a) your taxable income (ignoring any business losses) for that year;

(b) your reportable fringe benefits total for that year;

(c) your reportable superannuation contributions for that year

(d) your total net investment losses for that year.

In your case you meet the <$250,000 income requirement and therefore have access to the four tests mentioned above. However, you do not meet any of the four tests. Consequently, you would ordinarily be required to defer your losses from your activity.

However, the losses will not be required to be deferred if the Commissioner exercises the discretion under subsection 35-55(1) of the ITAA 1997 for either 'special circumstances' or 'lead time'. You have requested that the Commissioner consider the 'lead time' discretion.

Lead time

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where:

· the business activity has started to be carried on and for that or those income years, because of its nature it has not satisfied, or will not satisfy, one of the tests set out in Division 35 of the ITAA 1997, and

· 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.

The 'Note' to paragraph 35-55(1)(b) of the ITAA 1997 states:

Note: This 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. For example, an activity involving the planting of hard wood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

The phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests.

The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons.

Planting occurred in 2008-09. You have stated in your business plan that you will meet the assessable income test within two years. You state that the delay in deriving income is the time it takes for the plants to establish.

You have provided independent information that the plants take two to three years before they produce a crop at full yield.

Based on the above, it is considered appropriate for the Commissioner to exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2008-09 and 2009-10 income years.

You can claim a deduction for your losses against other income in the 2008-09 and 2009-10 years.