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Edited version of private ruling
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Ruling
Subject: Commissioner's discretion
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 primary production enterprise in the calculation of your taxable income for the 2009-10 to 2012-13 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
The scheme commenced on
1 July 2009
Relevant facts
You purchased an established primary production business activity in 19XX.
The original business was first established in 19XX.
You expanded your activities a few years later with the purchase of another established business.
This second business was first established in 19XX.
You have now expanded your business activities further with the purchase of land to establish another primary production activity to support your other businesses.
Your business activities have never produced income greater than the expenses attributable to it and you expect this to be the case until the 2014-15 financial year.
Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this will be the case for the 2010-11 to 2012-13 financial years as well.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 35-1.
Income Tax Assessment Act 1997 Subsection 35-55(1)
Income Tax Assessment Act 1997 Paragraph 35-55(1)(c).
Income Tax Assessment Act 1997 Subsection 35-10(2E).
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).
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.
Where an ongoing business activity is purchased by a new owner, the 'period that is commercially viable for the industry concerned' is taken from the commencement of the activity, not when the activity was purchased by the new owner.
In your case, you purchased an established primary production business when you commenced your business activities, therefore the commercially viable period for your activity is taken from the date the original business was established and not when it was purchased. In your revised projected income and expenditure statement, you have projected that your business activity will not produce income greater than deductions attributable to it until 2014-15 financial year. This is XX years after the original business was established.
Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business activity is XX years.
The reason your business activity is producing a loss is due to the continued expansion of the business beyond what the income it produces can support. This is peculiar to your situation and is not inherent to the nature of the business.
Where a 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.