Edited version of private ruling

Authorisation Number: 1011797887658

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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 livestock activity in the calculation of your taxable income for the 2009-10 and 2010-11 financial years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You and your spouse are partners in a partnership conducting a livestock activity.

The activity commenced in the 2002-03 financial year on a property. The average livestock numbers were X,000 head.

Subsequent and in addition to this, you started to use another property. This property contains lucerne paddocks to enable the finishing of livestock and access to a water licence.

In the 2006-07 financial year, you added the use of an additional number of properties. These properties adjoin the original property and add XX,000 acres of grazing land. It also provides access to general allocation water and high security water. One of the properties provided direct access to water from a nearby river.

Another of the properties adds to the activity due to the ability to fell timber and run a different type of livestock in the flood country after flooding occurs across the property and thus providing a hedge for the business income.

The combined properties have a carrying capacity of approximately XX,000 livestock. However, you will run at approximately YY,000 head to ensure the long term viability of the properties.

Since aggregation of the land, you intended to build stock numbers to a level that would allow it to run at a tax profit. Unfortunately, the drought years have not allowed you to build stock numbers and profitability has been delayed.

You have stated the mean rainfall and the actual rainfall received.which was less.

Since January in the recent year, good rainfall has been received across the property and the decisions to hold and feed stock through the difficult years have been justified with the strong prices.

You have invested in water infrastructure to conserve and preserve the water supply to enable the business to operate under diverse climatic conditions.

You have stated that the accepted number of years before an activity in your industry becomes commercially viable is three to five years.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year and you expect your income to be more than $250,000 for the foreseeable future.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

Reasons for decision

For the 2009-10 and following income years there have been changes to the non-commercial losses legislation to limit the circumstances where business losses can be offset against other income.

The introduction of the income requirement test means that individuals with an adjusted taxable income for non-commercial loss purposes in excess of $250,000 for that year will not get access to the four tests. To be able to claim your losses in that year you have to be granted the Commissioner's discretion under section 35-55 of the ITAA 1997 or meet one of the exclusions.

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.

for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and


(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C).

The note to paragraph 35-55(1)(c) of the ITAA 1997 refers to the paragraph being intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. It provides the example of the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. 

Taxation Ruling TR 2007/6 deals with the exercise of the Commissioner's discretion and the meaning of 'because of its nature'. Paragraph 17 of TR 2007/6 states:

For the failure to satisfy one of the four tests to be 'because of its nature', the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type (see Federal Commissioner of Taxation v. Eskandari).

For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business, such as starting out on a small scale, the hours of operation or the need to build a client base.

In your case you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000.

You operate a livestock activity which commenced in the 2002-03 financial year. While the activity expanded with the additional properties between commencement and the 2006-07 financial year, it is considered that the activity commenced in the 2002-03 financial year. The nature of your activity predominantly continued to be livestock breeding and this original activity was progressively expanded by the addition of the subsequent properties.

You project that you will make a tax profit in the 2011-12 financial year. This is well outside the period which is considered commercially viable for your industry.

We accept that the properties were in an area which was affected by drought in the 2006-07 to 2008-09 financial years. However, allowing for these special circumstances, a profit will not have been made within a commercially viable period.

It is considered that it is not the nature of the activity that has affected your ability to make a profit in a commercially viable period. Rather, it is your decision to expand the business and thereby incurring additional expenditure.

The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997. You cannot claim a deduction for your losses against other income in the 2009-10 and 2010-11 financial years and the losses must be deferred.