Edited version of private ruling

Authorisation Number: 1011830296217

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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 share of the cattle breeding business in your calculation of taxable income for the 2009-10, 2010-11 and 2011-12 financial years?

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts

A partnership operates a beef cattle breeding business.

There are a number of individual partners in the partnership and one is a proprietary limited company.

In recent years you have spent money on:

· Fencing of grazing areas into small paddocks to control the cattle herd;

· Development of a complex matrix of watering points, ensuring that cattle are always well watered and well fed;

· Movement of cattle to fresh paddocks on a weekly basis, preventing soil and pasture degradation; and

· Rotational use of all the grass, reducing the risk of fire.

The partnership owns the land, plant, equipment and livestock.

The day to day management of the business is carried out by a manager and employees.

You expect to make a tax profit in the 2012-13 financial year.

Independent Evidence

You supplied independent reports from industry experts.

Authors stated that the "traditional" grazing industry is unviable and unstainable unless changes are made to watering methods, fencing, control of the herd and herd fertility.

If the cattle grazing industry invests the necessary capital and develops waters and fences, individual operations can return to sustainable profitability and environmental sustainability in 5 to 7 years.

Another expert stated the beef industry in this part of the country requires different genetics and there is an important debate to be had about selecting for size at the expense of reproductive capacity. The current focus on breeding cattle for growth rate and size - responding to signals from the fattening and growing-out of the business, meant the interval between calving had blown out. He also said that this is one reason the beef industry in this part of Australia is currently unprofitable and unsustainable.

The partnership has taken steps to implement steps suggested by various industry experts as follows:

Control of the entire herd using quality grazing management systems, utilising the areas where intensive fencing and water infrastructure have been developed;

· Controlled mating;

· Early weaning of calves;

· Minimise overgrazing;

· Keep cattle close to yards for quick musters;

· Increasing the bull percentages in heifer mobs; and

· Introduction of "composite" bulls.

These strategies are specifically aimed at increasing calving percentages. (Herd productivity).

You failed the income requirement, as outlined under subsection 35-10(2E) of the ITAA 1997, in the 2009-10 financial year and also expect to fail the requirement in the 2010-11 and 2011-12 financial years.

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 Subsection 35-55(1)(c)

Reasons for decision

Commercially viable period

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:

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

· the exception applies

· 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 the exception. 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

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

Industry experts have stated the "traditional" grazing industry in that part of the country is unviable and unstainable unless changes are made to watering methods, fencing, control of the herd and herd fertility and if the cattle grazing industry invests the necessary capital and develops waters and fences, individual operations can return to sustainable profitability and environmental sustainability in 5 to 7 years.

The partnership has taken steps to implement a program of improving water facilities, individual fencing and the herd fertility. You have estimated the business will make a taxable profit in the 2012-13 financial year.

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, 2010-11 and 2011-12 financial years.