Edited version of private ruling

Authorisation Number: 1011811426895

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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 ITAA 1997 to allow you to include any losses from your business in the calculation of your taxable income for the 2009-10 to 2012-13 income years?

Answer: No.

This ruling applies for the following periods

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

The scheme commenced on

1 July 1996

Relevant facts

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

· your application for private ruling which we received on 21 March 2011; including

· your business plan; and

· further information provided.

You established a business in when you first planted produce on your property.

The property consists of a number of acres of produce, a large dam, a home and a retail outlet which were established over time.

The initial plantings were a number of hectares and there have been subsequent plantings and grafting of a portion of the original plants.

Prior to early recent years, your produce was processed through contract processors. The first processed product for the business was in 200X.

Your business plan states that while this period produced some excellent produce, outsourcing the processing was an inefficient and unsustainable business, therefore, when financial resources permitted, planning commenced for the design and construction of a modern and efficient processing plant allowing the 'new' business to commence in the 200Y year.

Your business plan states that you terminated one business and commenced your 'new' business allowing complete production of your produce to a retail outlet level.

You state that the 'new' business commenced producing and selling your product under a new label as well as selling products from your original label.

Your business plan states that your employment of a consultant and production manager will enable tighter control of business costs

You state that before early 200Y, the business did not 'produce and sell' your product.

You have provided figures for projected income and expenses based on your plan to increase sales and apply a costs control approach, showing that you expect to make a profit in an upcoming financial year.

Your income for non commercial loss purposes for the income year 2009-10 was more than $250,000 and you expect your income to remain above that level in the next few income years.

You commenced claiming losses from your business activities in the relevant financial year.

You had developed your experience in the industry whilst a partner in a previous business dealing with the same product in the same region for many years.

Reasons for decision

Summary

Your activities prior to 200Y and after 200Y are not considered to be two separate business activities for the purpose of the non-commercial loss provisions.

Further, the Commissioner is not able to conclude that the period your activity will take from commencement to the achievement of a tax profit is within a period that is commercially viable for your industry.

Therefore, the Commissioner will not 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 business for the 2009-10 to 2012-13 financial years.

Detailed reasoning

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 2009-10 income year and you expect this will be the case in the next few income 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).

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.

Where there are separate business activities, division 35 of the ITAA 1997 needs to be applied to each business activity separately.

You state that you terminated one business and commenced a 'new' business in 200Y.

The question of whether there are one or separate business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or separate/multiple business activities. These include the location of each of activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

In your case, the only apparent differences between your pre-200Y and post-200Y activities are that:

· the processing, which was previously outsourced, is now conducted on-site; and

· you now offer contract processing (for others).

You state that 'before 200Y, the business did not 'produce and sell' your products which were marketed under your label as prior to then you outsourced the processing. However, we consider that the facts show that you have been growing produce and producing and selling the finished products under your label for several years.

The fact that you were paying others to produce the finished product on your behalf before you built your on-site production facility does not mean that you were not a producer before that time.

Your product is a packaged product under your business name. There is no evidence that you sold your produce to other processors for them to produce a product under their own, or third party labels. Your product and the market is the same pre-200Y and post-200Y, that is, a finished product for the Australian and export market.

The activities are interdependent and any commercial links are more than incidental. The first product was produced via contract processors but it was still your product. You also had an existing retail facility and stock from produce you grew before 200Y was used in your production after 200Y.

You state that the business was represented as a new business to selected potential clients before and after 200Y but there is no evidence that you have represented yourself as anything other than your established business name as a producer to the public at large.

Based on the facts and the overall impression, your pre-200Y and post-200Y activities are not considered to be two distinct business activities but one continuing business (albeit that you ceased outsourcing the processing and now produce your product on-site). It appears from the facts provided that the product you traded in was always the processed product (not the produce itself) so we do not consider a new business has commenced.

We acknowledge that your business now conducts an additional activity of contract processing but this does not alter our finding that division 35 of the ITAA 1997 will be applied to your activities as one continuing business which you commenced in the relevant year when you established the property.

In your projected profit and loss statement, you have shown that your business will not produce income greater than deductions attributable to it until a future financial year, some years after planting your first produce.

You state that the nature of your activity is such that there is a long lead time between the commencement of production and the ultimate sale of the product resulting in a 'minimum period of at least 5 years before overheads can be met and the activity can become commercially viable' but you have not provided objective evidence of the commercially viable period for the industry.

Without this information the Commissioner is not able to conclude that the years your activity will take from commencement to the achievement of a tax profit is within a period that is commercially viable for your industry.

Therefore, the Commissioner will not 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 business for the 2009-10 to 2012-13 financial years.