Edited version of private ruling

Authorisation Number: 1011839293623

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: non commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2009-10 to 2012-13 financial years?

Advice/Answers

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 2009

Relevant facts

You are a sole trader and operate a fruit growing activity.

You have over 5000 fruit trees planted and you expect to increase this amount in 2012.

Some of the fruit trees were first planted in 19XX and the trees have been progressively planted until 20XX. Your business commenced in the relevant year.

You use staff to undertake the work.

You planted different varieties of the same fruit tree.

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

Your other income for non-commercial loss purposes was above $250,000 for the 2009-10 financial year and you also expect it be above that amount in the 2010-11, 2011-12 and 2012-13 financial years.

It is your contention that production takes 10-12 years to become commercially viable.

Relevant legislative provisions

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

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

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

Reasons for decision

Commercially viable period

For the 2009-10 and later financial 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 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 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/s 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.

Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied.

As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542 (Scott's Case), the court upheld the Commissioner's decision in not applying the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years. The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis.

In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the court expressed the following view:

It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities.

In your case you planted fruit trees progressively from 19XX to 20XX and you now have many planted. You expect to make a taxable profit in the 2012-13 financial year.

You anticipate that it will take your business 15 years from the first year in which trees were planted to make a taxable profit.

From the information you have provided, it appears that your activity could make a tax profit several years before this if you chose to plant all the trees at the start rather than adopt a staggered planting approach. This is in line with the widely accepted commercially viable period for this particular kind of fruit of 5 to 6 years.

It is acknowledged that you would have had your grounds for taking a staggered planting approach. However, the reason that your business activity will not make a profit until 2012-13 is due to a decision you have made with regards to how you run your business rather than due to any inherent features of the industry. That is, another business in the same industry could make a tax profit in a substantially shorter time frame if it did not adopt a staggered planting approach.

You have not shown that your business will produce a tax profit within the commercially viable period for the industry concerned. Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in relation to your fruit growing activity for the 2009-10 to 2012-13 financial years. Consequently, any losses from your activity in these financial years are required to be deferred.