Edited version of private ruling

Authorisation Number: 1011746862345

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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 farming enterprise in the calculation of your taxable income for the 2009-10 to the 2018-19 financial 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

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commenced on

1 July 2009

Relevant facts

You commenced your farming business activities in 200X on a XXX acre property.

You also lease a large adjoining property to support your expanding enterprise.

Your family's private residence is also situated on the property.

Income is derived from selling the livestock you breed, as well as trading other trade livestock depending on seasonal and market conditions.

You commenced your activities with XX breeding stock and that has now more than doubled.

You plan to build your core breeding stock to YY by the 2012-13 financial year.

You have stated that the region where your property is situated has suffered a prolonged drought for almost the entire period you have owned it.

This drought meant you had to balance stock numbers and provide supplementary feeding to maintain your core breeders. The progeny available for sale was reduced and you had no capacity to trade in store stock.

You have estimated the impact of the drought, between the 2003-4 and 2009-10 financial years, has cost you approximately $350,000 in lost income.

You have stated that the high price of land in the area has also contributed to your losses to date. Your off farm employment requires a lot of customer contact and you were 'forced' to acquire property in a 'popular' corridor close to major cities.

You state that if you had been able to acquire less expensive land with the same carrying capacity you could have reached a profitable position sooner.

Your current borrowings stand at over $1,000,000 with interest repayments of more the $90,000 per annum.

Based on your 14 year financial forecast, your anticipated maximum gross income, of $78,100, will be reached in the 2015-16 financial year, and the enterprise will produce a tax profit in the 2018-19 financial year.

Your current borrowings are projected to be paid out by the 2024 financial year, giving you an annual net income of $47,000 from the 2024 financial year onwards.

Your income for non-commercial loss purposes in the 2009-10 income year was above $250,000 and you expect this will be the case in future financial years as well.

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.

You commenced your livestock farming business in the 200X financial year. Your business is carried out on your own XXX acre property and a large leased property, adjoining yours. You have stated that the region where your property is situated has suffered a prolonged drought. This drought meant you could not expand your breeding herd and the progeny available for sale was reduced. You also had no capacity to trade in store stock during this period.

The high price of land in the area has also contributed to your business losses. As your off farm employment requires a lot of customer contact, you were 'forced' to acquire property in a 'popular' corridor close to major cities.

In your projected income and expenditure statement, you anticipate that your business activity will not produce income greater than deductions attributable to it until the 2018-19 financial year, or 17 years after your business began.

Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for a livestock farming enterprise is 17 years. The reason your farming activities will not produce a profit until the 2019 financial year is due to the small scale in which it is carried on compared to the level of borrowings needed to acquire farming land closer to your place of employment. It is accepted that drought conditions in the region have contributed to your losses to date. However, your own estimated drought impact figures and your projected maximum gross income amounts, indicate that had your farming enterprise not been affected by drought, it still would have produced a loss due to the high level of debt required for the prime location. Therefore, it is considered that the ongoing losses incurred by your farming enterprise are due to your particular circumstances and are not inherent to the nature of the livestock farming business generally.

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 for the 2009-10 to 2018-19 financial years.