Edited version of private ruling

Authorisation Number: 1011717128521

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Ruling

Subject: Commissioner's discretion

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 mixed farming enterprise in the calculation of your taxable income for the 2009-10 income year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

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

The property on which your business is conducted is rented from a related entity but the business is operated under your own name as a sole trader.

When purchased, much of the property's infrastructure had fallen into disrepair.

Since purchase, significant efforts have been made to eliminate weed infestations, renovate pastures, establish fodder cropping areas and repair irrigation infrastructure.

To date you have been unable to expand your mixed farming enterprise due to weed infestations which have required on-going treatments over a long period of time.

With current weed infestations and control measures, you are still not able to use some paddocks and you do not expect to have your farm at full capacity for seven years.

You have identified three significant contributors to the business losses in recent years; these are rental expenses, depreciation expenses and contract management fees in the business financials.

Annual rental of the property has been $140,000. This amount was determined by a valuer as 8% of the property's 2007 valuation. You now believe that, post the global financial crisis, this amount is overstated and you have now adopted a recommendation that the rent should not exceed 3.5%.

Large depreciation expenses are due, in part, to the investment allowance component of the Federal Government's recent stimulus package which you took advantage of to purchase new capital equipment which provided a one off deduction in the year of purchase of 50%. In addition, with access to the small business entity tax concessions, you have been able to depreciate your plant and equipment at a rate of 30% per annum on a diminishing value basis which overstates the true depreciation costs being borne by the business. Capital expenditure over the next few years is not expected to exceed $20,000 per year.

The other large expense is the contract manager's fees and the farming enterprise currently bears this cost. However, after operating the property for a few years you have determined that the manager's role also includes overseeing the maintenance of the property and its fixed assets and, as a result, it is now proposed that 50% of these fees now be met by the land owner.

You employ one full time farm manager; however, you regularly visit the property and personally oversee the enterprise strategy.

You have stated that the commercially viable period for this industry is seven to ten years and you believe your enterprise will produce a profit by the 2016 income year or nine years after it commenced.

You have provided independent evidence that the commercially viable time period for your industry to achieve an initial tax profit is likely to be approximately five years with full productivity being reached after seven years.

Your income for non commercial loss purposes for the 2009-10 income year was more than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

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 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, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000.

In order to exercise the discretion, the Commissioner must be satisfied 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).

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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

You conduct a mixed farming business. You have provided evidence from an independent source which states that your business activities should reach full productivity within seven years but is expected to produce a tax profit within five years and that they consider this to be a commercially viable time period for your industry.

You have stated that you intend to expand your business over the next five years and do not expect to make a tax profit until the 2015-16 income year or nine years after your activities commenced. This is due to several factors, including the condition of your property when it was purchased. You have stated that the weed infestation on the property has prevented your mixed farming activities from reaching full capacity and productivity. You are still not able to use some paddocks.

The reason your business activities are producing a loss is not due to the inherent nature of the business activity but is due to your specific circumstances. These include the condition of the property when it was purchased, the limited output of your business activities as a result of the property's condition and the high lease and management fees you have been paying.

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