Edited version of private ruling

Authorisation Number: 1011829066929

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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 primary production activity in your calculation of taxable income for the 2009-10 to 2011-12 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

The scheme commenced on

1 July 2007

Relevant facts and circumstances

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your income for non-commercial loss purposes was more than $250,000 in the 2009-10 financial year.

In the relevant financial year you purchased an established farm of fruit trees. The trees were planted some years ago. The property was in good condition when you bought it.

You operate the business by yourself and casual workers during harvest period. All fruit is hand picked, chilled and packed on the property.

Fruit tonnage is typically 25-40 tonnes and sold to wholesale markets.

You have incurred high initial losses due to a high loan amount and high depreciation expenses against capital on plant and equipment, fruit trees and infrastructure.

The frost and unseasonal rain impacted your profitability in the first two years of ownership.

Your ownership structure is not able to place you in a profit situation within the first four to five years of ownership unless exceptional incomes occurred. Your business plan shows that a profit is expected in the 2012-13 financial year and improves as loan and depreciation allowance fade.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision

Summary

The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to 2011-12 financial years on the basis that your activity will not produce a tax profit within a commercially viable period for your industry.

Detailed reasoning

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 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 satisfy the income requirement as your income for non commercial loss purposes is above $250,000.

Paragraph 35-55(1)(c) of the ITAA 1997 states that 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 is not peculiar to your situation. 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.

Where an ongoing business activity is purchased by a new owner, the 'period that is commercially viable for the industry concerned' is taken from the commencement of the activity, not when the activity was purchased by the new owner.

In your case, you purchased an established orchard when you commenced your fruit growing activities, therefore the commercially viable period for your activity is taken from the date the orchard was established and not when it was purchased by you. In your projected income and expenditure statement, you have projected that your business activity will not produce income greater than deductions attributable to it until 2012-13 financial year. This is X years after the last trees were planted by the original owners.

We acknowledge that you have provided information regarding the fruit growing industry from an independent source. The information provided show that full production would be achieved when the trees are Y years old.

Taking into consideration the information you have provided, the Commissioner is not satisfied that your activity will produce a tax profit within a commercially viable period for your type of business activity.

You also stated the reason your business activity will produce losses until the 2012-13 financial year is due to the high level of debt and depreciation incurred in the purchase of the property. Paragraph 78 of Taxation Ruling TR 2007/6 states that the level of debt funding is not an inherent characteristic of a business activity and would not result in the requirements of subparagraph 35-55(1)(c)(i) being met.

Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

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 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.