Edited version of private ruling

Authorisation Number: 1011748018392

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Ruling

Subject: Non-commercial losses - 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 fruit growing in your calculation of taxable income for the 2009-10 and 2010-11 financial years?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant legislative provisions

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

Relevant facts

You carry on a business of growing fruit in partnership with your spouse.

You commenced the business in the particular financial year and the grove was planted n the same year.

Your adjusted taxable income for non-commercial loss purposes for the 2009-10 financial year was more than $250,000 and you expect this will also be the case in the 2010-11 financial year.

You have approximately X00 trees planted.

You state that it is accepted in the industry that the time from planting to first commercial harvest is usually four to five years with full commercial production generally achieved by years 7-9.

You expect to make a tax profit from your business in the 2011-12 financial year (Year 6 since first planting).

You advise that you had to moderate fruit production in Year 4, but the yield was substantially affected by heavy rains which caused an infection. Nevertheless you expect a good commercial crop in Year 5, which is still within the timeframe of four to five years.

You are requesting the Commissioner's discretion that your business activity will be commercially viable within a period that is accepted in the industry.

You have provided details of income and expenses for the 2005-06 to 2009-10 financial years and projected income and expenses for the partnership for the 2010-11 to 2016-17 financial years, showing you expect to make a profit in the 2011-12 financial year.

You have provided two independent reports regarding when your groves might reach profitability.

One report confirms that full production typically begins at 9-10 years and a taxable profit would not likely be achieved before 2013 (Year 7) and could take longer (that is, between 2014 and 2017).

The other independent advice provides that fruit production will commence in two to three years and a good commercial crop can commence by four to five years after tree planting. Their advice also notes that full commercial production does not begin until 9-10 years and that yields up to year 7 can be highly variable.

This advice also states that gross margins are not profit figures as overhead costs are not taken into account and that the cash flow budget provided was drawn up over a development period of 20 years. In other words the time frame to full commercial production may be different to the time frame to taxable profitability.

An industry fact sheet states this type of fruit tree will come into commercial bearing in two to three years. Most will take at least four to five years, but that maximum production is not generally achieved until years 7-8.

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 a 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 financial year and you expect this will also be the case in the 2010-11 financial year.

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).

For the Commissioner to exercise the discretion 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.

In your projected profit and loss statement, you have shown that your business activity expects to produce income greater than deductions attributable to it in the 2011-12 financial year which is six years after the activity commenced.

You have provided evidence from independent sources that indicates that six years is within the commercially viable period for this type of fruit growing. 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 fruit growing enterprise for the 2009-10 to 2010-11 income years.