Edited version of private ruling

Authorisation Number: 1011795329331

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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 olive growing in your calculation of taxable income for the 2009-10 to 2011-12 financial years?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2008

Relevant facts

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 application for private ruling which we received on 15 December 2010; and

· further information which we received on 15 April 2011 and 3 June 2011.

You purchased a property, which included a large number of fruit trees, in July 2008.

You commenced a business of growing fruit in the 2008-09 financial year.

You state that the fruit trees were planted in 2005 and at time of purchasing the property the trees were in poor condition as they had not been tended.

You have approximately 4,000 fruit trees on approximately 12 hectares, which includes approximately 750 new trees you planted in the 2009-10 financial year.

You state that you had intended to produce the fruit under your own brand, but pending prices, you may choose to sell either all or part of your crop to a third party.

Your projections relate to selling the fruit fresh. This ruling is provided on the basis that your intention is to sell the fruit as fresh fruit.

You state that the trees were 3-5 years old when the property was purchased, but due to fire destroying most of the trees and infestations with bugs they were equal to 2-3 year old trees. They had also not been tended.

You contracted a horticultural specialist to provide advice on restoration and rejuvenation of the grove for long term production and marketing of produce.

It was necessary to prune them back substantially, costing one year's production.

You currently have a total of 3,700 fruit trees on approximately 12.3 hectares, which includes 700 new trees you planted in the 2009-10 financial year.

The grow various varieties of a particular fruit.

The business is operated by you and three employees (one permanent and two casual).

You state that while limited production will commence at two to three years, first commercial harvest is usually four to five years with full commercial production beginning at nine to ten years.

Information sourced from the NSW Department of Primary Industry (NSW DPI) provides that fruit production will commence in two to three years and a good commercial crop can commence by four to five years after tree planting. Their advice also notes that full commercial production does not begin until 9-10 years and that yields up to year 7 can be highly variable.

Information provided from a NSW DPI document also states that gross margins are not profit figures as overhead costs are not taken into account and suggests that the time frame to full commercial production may be different to the time frame to taxable profitability.

No produce for sale will be available until the 2012-13 financial year, when you anticipate your first commercial harvest, with the initial 3,000 trees expected to provide 40 kilograms of fruit per tree (120 tonnes). You plan to sell this fruit at an estimated price of $3 per kilogram.

You expect to make a tax profit from your business in the 2012-13 financial year (when trees are effectively 6-7 years old).

You have provided the actual and projected income and expenses for the 2008-09 to 2012-13 financial years.

You have provided details of your projected expenses.

Your income for non-commercial loss purposes is above $250,000 in the 2009-10 income year and you expect this will be the case in the 2010-11 and 2011-12 financial years as well.

Reasons for decision

For the 2009-10 and later income years, division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless:

· 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, reportable fringe benefits and reportable superannuation contributions but 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 in the nature of your business activity that there will be a period before a tax profit can be produced; and

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

Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry.

Consequently the Commissioner will exercise his discretion in the 2009-10 to 2011-12 financial years.