Edited version of private ruling

Authorisation Number: 1011773042104

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: non-commercial losses and the Commissioner's discretion

Question

Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your mixed farming activity in calculating your taxable income for the 2010-11 to 2014-15 financial years, inclusive?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have a property on which you operate two primary production activities - crop growing and animal fattening.

You have entered into a contract with a company to grow a crop.

Under the contract you sign an annual marketing agreement which contains an annual contracted price.

The company deducts a marketing, packaging and distribution allowance.

You have breeding animals which will produce young. The young will be fattened and sold.

The projected combined assessable income from your crop and animal activities will be less than $20,000 in the 2010-11 to 2014-15 financial years, inclusive. The combined assessable income from these activities is expected to exceed $20,000 in the 2015-16 and future years.

You advise that your mixed farming activities will not satisfy any of the tests set out in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-40 (other assets test) of the ITAA 1997 until the 2015-16 financial year.

Your taxable income for non-commercial loss will be less than $250,000 for each of the years ruled on but more than $40,000.

This ruling has been prepared on the basis that your mixed farming activities are being conducted as a business for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-30
Income Tax Assessment Act 1997 Section 35-55
Income Tax Assessment Act 1997 Paragraph 35-55(1)(b)

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as:

· a partner in a partnership that made a loss, or their net partnership distribution after deducting any eligible expenses resulted in a loss, or

· a sole trader (including an individual in a general law partnership) and made a loss

If your taxable income for non-commercial loss purposes is less than $250,000 and you are in business (for tax purposes) you can only offset the loss from a business activity against your income from other sources if you pass one of four tests, an exception applies to you or the Commissioner exercises his discretion in your favour.

The four tests are:

V) you have assessable income from the business of at least $20,000

VI) you have made a profit from the business in at least three out of the last five years

VII) you use real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business, or

VIII) you actively use other assets worth at least $100,000 (excluding motor vehicles) in the business.

The exception to passing the four tests applies where you carry on a professional arts business or a business of primary production. You may offset your business loss against your other income if your other income for that year is $X0,000.

The Commissioner may exercise his discretion to allow you to claim your business loss where the inherent nature of the business activity means that you will make losses for a number of years. For example, primary production activities that have an inherent lead time for the first crop to grow before harvesting.

Taxation Ruling TR 2007/6 recognises, at paragraph 23, that not all businesses will commence immediately at the start of the financial year and allows a tolerance of one year.

You have requested the Commissioners discretion in relation to the non-commercial loss provisions for the years ended 30 June 2011 to 30 June 2015 as you will not meet any of the four tests and the exception does not apply to you.

You are carrying on two primary production activities - crop growing and animal fattening. It is accepted that it is in the nature of these activities there will be a lead time before a profit can be made or one of the tests passed.

Information held by the Commissioner indicates it takes 4 to X years for the crop growing activity and X years for the animal fattening activity to reach commercial production.

You commenced your mixed farming activities during the 2010-11 financial year and expect to meet the assessable income test during the 2015-16 financial year, X years later.

It is accepted that meeting a test within six years of planting your crops and commencing your animal fattening activities will be within a commercially viable period for your mixed farming activity.

The Commissioner will exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the years ended 30 June 2011 to 30 June 2015, inclusive, as it is accepted that it is in the nature of your mixed farming activity that there will be a lead time before profit can be expected or one of the tests will be satisfied. This means that any loss for your activity can be taken into account in calculating your taxable income for that year, provided that the arrangement carried out does not differ materially from that described in the ruling.