Edited version of private ruling

Authorisation Number: 1011775238828

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Ruling

Subject: Non-commercial losses - 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 growing in your calculation of taxable income for the 20XX-XX to 2012-13 financial years?

Answer

Yes.

This ruling applies for the following period
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commenced on
1 January 2008

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 carry on a business of growing fruit in partnership with your spouse.

You have registered a trading name.

You intend to sell the fruit and processed (frozen) fruit on the international market.

You commenced the business in the 20XX-XXfinancial year.

Your income for non-commercial loss purposes in the 20XX-XX financial year was greater than $250,000 and you expect it to be above this level for the 20XX-XX to 2012-13 financial years as well.

You have planted a total of approximately X,XXX trees and further land has been cleared for future plantings.

You planted your first fruit trees in the 20XX-09 financial year (approximately 75%) and further trees in the 20XX-XX and 20XX-XX financial years.

The business is operated by you and your spouse, with the support of two part-time employees.

You state that, from planting fruit variety you have planted takes six to eight years typically to produce mature fruit of sufficient quantity and quality to be commercially viable.

You have provided a Primefacts document produced by your State's government Industry and Investment which states that the trees are not normally considered to be satisfactorily fruit bearing until six years after planting.

You have provided a 'Projected Income Plan' included in your business plan which was based on a slightly more optimistic basis this but assumed optimal seasons and therefore optimal fruit production from each tree.

The business is affiliated with a national association involved in the tree variety.

Marketing for the association is currently undertaken. The target market for fresh fruit is Europe. The target market for frozen fruit is Japan and the United States of America.

Your first version of your business plan anticipated the first large scale crop to be harvested in summer 20XX. This will not be achieved due to heavy and persistent rain during the latter half of 20XX which has caused damage to flowers and therefore failure of flowers to set fruit.

You had thought that, if weather conditions improved, it was possible that a small, late crop might be obtained in the second quarter of the 20XX-XX financial year.

You now state that the projected income originally provided is likely to be pushed back twelve months due to severe weather events (including heavy rain).

You have provided income and expense figures for the 20XX-XX financial year.

You have provided projected income and expense figures showing an expectation of profit in the 2013-14 financial year.

The income projections were based on 20XX sales prices and a wastage percentage of 50%.

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 the 20XX-XX financial year and you expect this will be the case in the 20XX-XX to 2012-13 financial years as well.

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.

Your figures show that expect a profit in the 2013-14 financial year, five years after planting your first fruit trees.

You have provided evidence from independent sources that indicate that six years is within the commercially viable period for the variety of fruit trees that your grow. Based on the evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater that the expenses attributed to it.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your growing enterprise for the 20XX-XX to 2012-13 financial years.