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Edited version of private ruling
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Ruling
Subject: Non-commercial losses - Commissioner's discretion - lead time
Question
Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your primary production activity in the calculation of your taxable income for the 2009-10 income year?
Answer
Yes.
This ruling applies for the following period
For year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You conduct a stud breeding activity.
The business activity satisfies three of the four non-commercial losses tests (assessable income test; real property test and other assets test).
You expect to make a profit in the 2010-11 financial year.
Your income for non-commercial losses purposes exceeds $250,000.
Information you have provided states that there is at least, a 10 year lead time to establish a stud when starting out from scratch, building up a stud herd and establishing a client base. There is a long lead time to breed stud animals from conception to point of sale (3 years), then to establish markets and to sell those animals.
Special circumstances have seriously adversely impacted on the business to stop it from making a profit to date.
The drought that has impacted Australia over the last decade has had a significant impact on the stud. A stud is dependent upon its breeding stock and cannot afford to sell its livestock in times of drought. It has impacted upon feed costs in particular.
Due to the drought pastures generally were poor and as well as the supplementary feeding, stock were placed on agistment to attempt to deal with the drought conditions.
The combination of the conditions has meant that the business has not moved to a profit as quickly as it could reasonably have expected to have done. The offspring rates are affected and this has a flow on multiple affect in later years, as there is less stock for sale, there are less females to introduce to the breeding herd and development of the bloodlines.
The reports from professionals in the industry, provide expert industry support for the proposition that this business will make a profit and will be commercially viable within the period of time consistent with their experience of the industry concerned.
Reasons for decision
From the 2010 financial year, 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. The income requirement is set out in subsection 35-10(2E) of the ITAA 1997. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.
In order to exercise the discretion, the Commissioner must be satisfied, 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).
In your case, you do not meet the income requirement as your adjusted taxable income for non-commercial loss purposes is above $250,000. However, you have supplied evidence from an independent source which has established that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a period that is commercially viable for this industry, after taking into account the impact that drought and bushfire has had on the business activity.
Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income for the 2009-10 financial year.