Edited version of private ruling

Authorisation Number: 1011758379013

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Ruling

Subject: Commissioner's discretion - lead time

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your plantation activities in the calculation of your taxable income for the 2011-12 to 2019-20 financial years?

Answer

Yes.

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your plantation activities in the calculation of your taxable income for the 2020-21 to 2025-26 financial years?

Answer

No.

This ruling applies for the following periods

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

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

The scheme commenced on

1 July 2011

Relevant facts

You purchased an established plantation in 20XX.

The plantation was first established in 19XX.

Apart from some commercial thinning, the harvesting will not begin until the 20XX-XX financial year.

Your projected profit and loss statement shows the first harvest will return a net profit in the 20XX-XX financial year.

You have provided evidence that the lead time for this type of plantation, from planting to harvest, is a few decades.

You expect that the assessable income you receive from sources unrelated to your plantation activities will be greater than $XXX in the 2011-12 to 2025-26 financial years.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - Subsection 35-10(4)

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(b)

Reasons for decision

Carrying on a business

If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997. 

In your case, you have indicated in your application that your activity is carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you will be carrying on a plantation business during the 2011-12 to 2025-26 financial years.

The Commissioner's discretion - lead time 

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

· the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and  

· there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year.  

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997. The following has been extracted from paragraphs 70 to 104 of this Ruling. 

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying any of the tests. 

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The 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. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 

In your case, you have provided evidence that the time from planting to harvest for this type of plantation is a few decades. The plantation that you have purchased was first planted in 19XX. You expect to produce a tax profit in the 20XX-XX financial year when you begin harvesting the trees. This will be X years after the first trees were planted and within a time that is consistent with the commercially viable period for this industry.

Therefore, the Commissioner will exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your plantation business against your other assessable income for purposes of calculating your taxable income for the 2011-12 to 2019-20 financial years.

The lead time discretion begins at the commencement of the activity and ends when one of the tests is satisfied or a tax profit is produced. You have provided evidence to show that you will produce a tax profit in the 2020-21 financial year, therefore, the Commissioner is unable to exercise the discretion for the 2020-21 to 2025-26 financial years.