Edited version of private ruling

Authorisation Number: 1011722312624

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Ruling

Subject: Commissioner's discretion

Questions:

1. 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 winery enterprise in the calculation of your taxable income for the 2009-10 and 2010-11 income years?

Answer: Yes.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your winery enterprise in the calculation of your taxable income for the 2011-12 and 2012-13 income years?

Answer: Yes.

3. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your winery enterprise in the calculation of your taxable income for the 2013-14 and 2014-15 income years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

In 2008, you purchased an established vineyard.

Your objective is to establish a successful winery and vineyard.

When purchased, the grapes produced were sold, under contract, to another wine producer.

Currently, the vines and the vineyard are subject to an extensive improvement plan with a view to establishing a winery.

The wine will be marketed with a premium label to be sold through a cellar door facility, the use of boutique wine website facilities and to corporate and private clientele.

In 2010, the vineyard suffered extensive hail damage which defoliated and damaged the vines.

The fruit was destroyed or severely down graded through much of the region.

The storm caused damage to the secondary and tertiary buds on the vines, which form the basis for the next year's crop, and, if damaged, will reduce the size and quality of the crop.

You employed a new contractor to manage your vineyard and help regenerate your vines with your first crop to be used for wine production to be picked in 2012.

In your projected profit and loss statements, you do not expect to produce a profit from your winemaking activities until after the 2012-13 income year.

Your income for non commercial loss purposes for the income year 2009-10 was more than $250,000 and you expect your income to be more than $250,000 in the 2010-11 to 2012-13 income years.

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)(a).

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 the 2009-10 income year and you expect this will be the case in the 2010-11 to 2012-13 income years as well.

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.

You commenced your winery enterprise in 2008 when you purchased a long established vineyard. When purchased, the grapes produced were sold, under contract, to another wine producer. Your objective was to establish a successful winery and vineyard.

Your plans to produce your own wine have been delayed due to a severe hailstorm in early 2010 that caused damage to the secondary and tertiary buds on the vines, which form the basis for the next year's crop. You now expect your first crop to be used for wine production to be picked in 2012.

To apply the discretion in paragraph 35-55(1)(a) of the ITAA, the Commissioner should be satisfied that the business activity is affected in the relevant years by the special circumstance.

Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(a) may be exercised. The following has been extracted from paragraphs 47 to 53 of this Ruling:

Although not limited to natural disasters, paragraph 35-55(1)(a) refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity.

As a result of the damage caused by the hailstorm in 2010, your crops for the 2009-10 and 2010-11 income years were reduced, delaying the commencement of your winemaking activities. It is accepted that the hailstorm was outside of your control and that your winemaking activities were affected by special circumstances in the 2009-10 and 2010-11 income years.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your winery enterprise for the 2009-10 and 2010-11 income years.

In your projected profit and loss statement, you have shown that your winery enterprise will not produce income greater than deductions attributable to it until after the 2012-13 income year.

Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater that the expenses attributed to it.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your winery enterprise for the 2011-12 and 2012-13 income years.

As your figures show that your winery enterprise will produce a profit in the 2013-14 and 2014-15 income years, the Commissioner cannot exercise the discretion for these years.