Edited version of private ruling

Authorisation Number: 1011786532566

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Ruling

Subject: Non-Commercial Losses 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 any losses from your olive growing business in your calculation of taxable income for the 2009-10 to 2017-18 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

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on

1 July 2008

Relevant facts

You purchased a property in 2008.

It was your intention to establish an olive grove.

Preparation of the paddocks for planting the olive trees commenced in 2009.

The planting will be done in 3 stages.

The second and third stages of planting have yet to commence.

You estimate that the venture will make its first tax profit in the 2017-18 financial year.

Prior to commencing your olive growing business you consulted many experts in the field.

The property has more than adequate water supplies.

You run the property with the assistance of contractors.

Contractors have assisted with paddock preparation and irrigation.

You will also engage contractors or hire casual staff as needed through the various stages of production.

You failed the income requirement under Division 35 of the ITAA 1997 in the 2009-10 financial year as your income from other sources was over $250,000.

Assumptions

It is assumed you will fail the income requirement under subsection 35-10(2E) of the ITAA 1997 for the 2010-11 to 2017-18 financial years.

Relevant legislative provisions

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

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

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

Reasons for decision

Summary

It is considered that the length of time your olive growing activity will require to make a tax profit is not simply a result of the nature of the activity. Rather your individual circumstances, that is, your choice to adopt a staggered planting approach, has substantially affected the period that will elapse before a tax profit is made. Another business in the same industry could make a tax profit in a substantially shorter time frame if it did not adopt a staggered planting approach.

You have not shown that your business will produce a tax profit within the commercially viable period for the industry concerned. Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in relation to your olive growing activity for the 2009-10 to 2017-18 financial years. Consequently, any losses from your activity in these financial years are required to be deferred.

Detailed reasoning

From the 2009-10 income year, the non-commercial loss (NCL) legislation has been amended to include an income requirement. The four NCL tests (the assessable income test, the profits test, the real property test, and the other assets test) that were previously accessible by all taxpayers are now only available to taxpayers who meet the income requirement.

Consequently, if the income requirement is not met, the taxpayer must defer their business loss unless the Commissioner exercises a discretion. A discretion is only available in certain circumstances.

The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not meet the income requirement. Therefore, your losses from your olive growing activity for the 2009-10 and later financial years must be deferred unless a discretion is exercised.

The discretion that is relevant in your circumstances is the 'lead time' discretion provided by paragraph 35-55(1)(c) of the ITAA 1997. In order to exercise this discretion, the Commissioner must be satisfied that there is an objective expectation, based on evidence from independent sources, that your business activity will produce a tax profit within a commercially viable period for the industry concerned.

For the Commissioner to exercise the discretion, you must also 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. That is, the reason why the business is making a loss must be due to the inherent features of the industry rather than the way the business is carried on.

Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied.

As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542 (Scott's Case), the court upheld the Commissioner's decision in not applying the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years.

The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis.

In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the court expressed the following view:

It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities.

You have asked the Commissioner to exercise his discretion in relation to lead time for the 2009-10 to the 2017-18 financial years.

You have predicted that a tax profit from your activity will be made 9 years after the planting of the first trees in Stage 1. From the information you have provided, it appears that your activity could make a tax profit several years before this if you chose to plant all the olive trees at the start rather than adopt a staggered planting approach. This is in line with the widely accepted commercially viable period for olive growing of 5 to 6 years.

It is acknowledged that you would have had your grounds for taking a staggered planting approach. However, the reason that your business activity will not make a profit until 2017-18 is due to a decision you have made with regards to how you run your business rather than due to any inherent features of the industry. That is, another business in the same industry could make a tax profit in a substantially shorter time frame if it did not adopt a staggered planting approach.

You have not shown that your business will produce a tax profit within the commercially viable period for the industry concerned. Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in relation to your olive growing activity for the 2009-10 to 2017-18 financial years. Consequently, any losses from your activity in these financial years are required to be deferred.