Edited version of private ruling

Authorisation Number: 1011746433168

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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 a share of losses from growing trees that will be ready for harvest in the relevant financial year?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commenced on

1 July 2009

Relevant facts

You bought land and planted trees on a majority of the land.

Half of the trees were planted before 30 June 2010 and the remainder were planted after 30 June 2010.

For the next ten years the foreseeable costs will be rates, insurance and tending the trees.

You currently earn over $40,000 from other sources.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10

Income Tax Assessment Act 1997 Subsection 35-35

Income Tax Assessment Act 1997 Subsection 35-55

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 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:

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

· 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)

· 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

· 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 relevant year. You will satisfy that test for an income year if the sum of the following is less than $250,000:

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

· your reportable fringe benefits total for that year;

· your reportable superannuation contributions for that year

· your total net investment losses for that year.

In your case you meet the 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 tree growing 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 nature of your activity or '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.

You planted in the relevant financial years, you have stated that you will meet the assessable income test within ten years. You state that the delay in deriving income is the time it takes for the trees to reach sufficient maturity to harvest.

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 relevant financial years.

You can claim a deduction for your losses against other income in the relevant financial years.