Edited version of private ruling

Authorisation Number: 1011753841969

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Ruling

Subject: NCL Special circumstances

Question

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 business activity in your calculation of taxable income for the 2009-10 financial 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 hold a Bachelor of Agricultural Science and are a member of a relevant Australian Institute.

In the 20XX-XX financial year, you started investigating the viability of commencing a new business activity in farming.

You undertook substantial research to learn more about the types of farming conducted in Australia as well as the production methodologies used, habitat, feeding and behaviour of the product you intended to farm.

You were granted a lease in June 20XX.

You prepared a business plan.

You lodged an expression of interest with a relevant department and then participated in training in order to qualify as a participant in the auction of leases.

You were successful in purchasing a Lease and also obtained a license from the department.

You have undertaken the following activities:

· Baseline environmental study, annual renewal

· License

· Cadastral survey and navigation marks placement

· Vehicle, crane construction, engine upgrade for bins

· Purchase of bins

· Manufacture of cages

· Establishment of securing devices

· Record keeping

In early 20XX, some of your equipment was stolen and was not replaced until late 20XX.

The equipment needed to support the bins was completed in June 20XX.

You anticipate placing bins for growing the product in May 20XX.

You do not have any product to the present time.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income exceeded $XXX,000 in the 20XX-XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Reasons for decision

In order for Division 35 of the ITAA 1997 to apply, a taxpayer must have commenced business. In determining when a business commences, there are three indicators that must be present before it can be said that a business has commenced. These are:

· purpose, intention and decision;

· acquisition of a business structure; and

· commencement of business operations

We must examine the above indicators in light of the characterisation of your business activity. In Goodman Fielder Wattie Ltd v. Federal Commissioner of Taxation 29 FCR 376; (1991) 22 ATR 26; 91 ATC 4438, where claims for business deductions prior to November 1982 were at question, Hill J stated:

Critical to the resolution of the present controversy, is the characterisation of the business activity itself which is said to have commenced. It was conceded properly by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982.

For example, for a primary production activity involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as a trading activity, involving conducting services in return for a fee, the business would generally be considered to have commenced once you begin conducting the services for a fee.

The information you provided clearly indicates that your intended business activity was best characterised as primary production activity. Your intention was to farm.

The indicators set out above are used to determine whether your business activity had commenced during the 20XX-XX financial year.

In your case, we accept that the first two indicators have been met. Therefore, we will only discuss the commencement of business operations.

Commencement of Business Operations

As noted by Brennan J in Inglis v. Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on.  Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention. It is a matter of activity.  Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

It is accepted that, because of the preparatory work you have undertaken, you had gone beyond merely having an intention to engage in business and there had been some activity. For example, you have purchased items necessary for the conduct of your business and you had acquired the relevant licences.

However, it is important in evaluating these activities to have a proper regard to the characterisation of your proposed business. The business you proposed to commence in the 20XX-XX income year was farming. Therefore, until you had acquired the product to put into the bins for farming, you will not have commenced business. While we accept that you have had some unavoidable delays, for example, the theft of the equipment and difficulty in getting them replaced, and avoidable delays, for example, you being unavailable due to other work commitments, this does not alter the fact that no product has been placed for farming.

We consider that, until the first product is placed, your activities are preliminary to the carrying on of your intended business and you were still in the course of establishing a business.

As the provisions of Division 35 of the ITAA 1997 only apply when a business is being carried on no discretion under Division 35 is available.