Edited version of private ruling

Authorisation Number: 1011789599772

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Ruling

Subject: non-commercial losses

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 farming activity in your calculation of taxable income for the 2009-10 to 2013-14 financial years?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your private ruling application

· your management report for the year ended 30 June 2010

· a spreadsheet outlining your projected income and expenditure to 2014-15.

You purchased a farm in early in the particular year.

The farm is run as a partnership by you and your spouse.

You intended to turn the property into a beef cattle farm and intend to sell 40-50 weaner/yearlings to the market each year.

Currently there are XX acres of the farm used to grow hay. You have an option on YY acres of adjoining property.

You intend to sell approximately XXX small bales and YYY large round bales of hay per year.

The farm has a completed a special facility for training horses. The farm has some agisted horses and has the capacity to agist further horses.

You have constructed an arena on the farm for the agisted horses to be trained by their owners in all weather conditions.

There are currently X horses on the farm, of which half are for personal use.

You have funded all of the capital improvements yourself with the view to running the farm long term.

The farm is now fully operational.

You incurred abnormal expenses after the bushfires (your farm was not directly affected) when prices increased and you were required to replace some of the fencing, the contractor did not complete the work and took some of your equipment.

You were also initially charged residential rates on the farm. You are currently in dispute with the council over these charges and expect to receive a refund.

You purchased two vehicles during the 200Y financial year to use predominately on the farm. You have sold one of the vehicles to reduce costs associated with the farm.

In your budget you have increased your agistment income as a major competitor in the region has sold his property to a developer, with the application currently at council, you expect you will be able to service the competitors current clients.

You have provided a cash flow budget, actual income and expenditure figures for the 2008-09 and 2009-2010 financial years and the projected income and expenditure figures for the 2011-12 to 2014-15 financial years.

Your income for non-commercial loss purposes for the 2009-10 and 2010-11 financial years exceeds $250,000 and you expect that your income for the 2011-12 to 2013-14 financial years will also exceed $250,000.

Reasons for decision

For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless (relevant to this division):

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where:

· it is because of the nature of your business activity it has not produced a profit and,

· there is an objective expectation your business activity will produce a tax profit within a commercially viable period for your industry.

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 not peculiar to your situation.

You commenced your cattle farming business in early 200X. You intend to expand your activities to increase your income from horse agistment and hay sales in the future.

You have not provided any evidence from an independent source to establish the commercially viable period for your cattle activities. However, the commercially viable period for the cattle farming industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached a saleable age.

We hold the view that income from agistment alone does not constitute a business of primary production for tax purposes (Taxation Ruling IT 225). AAT Case R28/84 ATC 258 (13 April 1984) considers at paragraph 5 that primary production means production resulting from... the maintenance of animals... for the purpose of selling them or their bodily produce.

The reason for this is that in cases where the property is used solely for agistment, income will rarely equate to the running costs of the property, therefore lacking a commercial character. We consider that, in most cases, the agistment of the property occurs as a prelude to the use of the property for some other purpose, for example a business of primary production or private use. It is usual to apportion these cases to allow expenses to the extent of income received.

It is acknowledged that you experienced abnormal expenses due to increased prices after the bushfire. However, this is a circumstance not peculiar to your particular business activity and is not inherent to the nature of the industry.

You have not provided objective evidence of the commercially viable period to make a tax profit for your type of primary production activity. Your intention is to expand your agistment and hay sale activities, which will not significantly increase your income but you expect that your business activity will show a small profit in the 2014-15 financial year.

Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.