Edited version of private ruling

Authorisation Number: 1011762240876

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Ruling

Subject: Non-commercial losses and the 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 livestock enterprise in your calculation of taxable income for the 2009-10 to 2013-14 income years?

Answer

No.

This ruling applies for the following periods

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

The scheme commenced on

1 July 2009

Relevant facts

You operate a livestock farm purchased in the 2000-01 financial year.

You purchased and sold male livestock in the first two years. You also purchased a different type of male livestock in the 2001-02 financial year.

You purchased female livestock in the 2004-05 financial year.

You have undertaken significant preparation work to allow the farming operation to commence.

You plan to build up numbers of high value livestock that will yield a higher selling price than common breeds.

Whilst building up the livestock, you have incurred ongoing costs.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 35-10(2E)

Reasons for decision

For the 2009-10 and following income years there have been changes to the non-commercial losses legislation to limit the circumstances where business losses can be offset against other income.

The introduction of the income requirement test means that individuals with an adjusted taxable income for non-commercial loss purposes in excess of $250,000 for that year will not get access to the four tests. To be able to claim your losses in that year you have to be granted the Commissioner's discretion under section 35-55 of the ITAA 1997 or meet one of the exclusions.

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.

…..

for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C).

The note to paragraph 35-55(1)(c) of the ITAA 1997 refers to the paragraph being intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. It provides the example of the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. 

Taxation Ruling TR 2007/6 deals with the exercise of the Commissioner's discretion under subparagraph 35-55(1)(c)(i) of the ITAA 1997 and the meaning of 'because of its nature'. Paragraph 17 of TR 2007/6 states:

For the failure to satisfy one of the four tests to be 'because of its nature', the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type (see Federal Commissioner of Taxation v. Eskandari).

For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business, such as starting out on a small scale, the hours of operation or the need to build a client base.

In your case, you operate a livestock farm purchased in the 2000-01 financial year. You commenced business with the purchase of male livestock in the 2000-01 financial year and the following year you purchased a different type of male livestock. In the 2004-05 financial year, you purchased female livestock. You have also undertaken significant preparation work and you are now building up numbers of stock.

The time when the commercially viable period begins is when you commence the business and not when you decide to make changes to it. In your case, your business has been operating for ten years. This timeframe is outside the commercially viable period for fattening livestock. It is the effect of the time consumed with preparation work, low stock numbers and the change from purchasing livestock for fattening to breeding your own stock for sale that resulted in the loss incurred in the 2009-10 income year and will prevent you from being commercially viable in the years in question within a period that is accepted in the industry.

It is not considered that commencing on a small scale and increasing your stock numbers in stages is an inherent characteristic of your industry. Therefore, this information does not alter the Commissioner's decision about exercising the discretion under paragraph 35-55(1)(c) of the ITAA 1997.

As your failure to meet one of the tests is not considered to be an inherent characteristic that your business has in common with other similar business activities the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997. You cannot claim a deduction for your losses against other income in the 2009-10 to 2013-14 financial years and the losses must be deferred.