Edited version of private ruling

Authorisation Number: 1011866959316

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Ruling

Subject: Non-commercial losses and the Commissioner's discretion

Question

Will the Commissioner exercise his discretion to allow you to include any losses from your primary production activities in calculating your taxable income for the years ended 30 June 2010 and 30 June 2017, inclusive?

Answer

No

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You own two properties on which you grow produce.

Both properties are managed by an industry related management company.

The first property was purchased in 19XX and is planted with produce trees. When the 20XX crop was harvested, the yields were lower than the previous year due to insufficient fertiliser and a portion of the orchard had a disease which reduced the trees ability to flower and reproduce. In 20XX a portion of the trees were removed and replanted with disease resistant varieties.

The second was purchased in 19XX. It was planted in stages between 20XX and 20XX.

The trees were planted in stages due to tree availability, budget and spending restrictions.

Due to reductions in nutrition and fertiliser the orchard did not perform well. In 20XX, a portion of the original trees were removed and replaced as the variety was underperforming.

Your produce growing activity has been affected by:

· disease which has also affected other properties in the area

· poor nutrition

· low yield due to climatic and pest problems, and

· a high Australian dollar discouraging overseas buyers.

You made a loss from your produce growing activity in the 20XX-X financial year and expect to continue making losses until the 2016-17 financial year when you will make a profit.

Your income for non-commercial loss purposes for the 20XX-10 financial year was more than $250,000. You expect your income for the 20XX-XX to 2016-17 financial years, inclusive, to be more than $250,000.

You have provided an extract from a government handbook advising

· production commences in the fourth or fifth year with trees maturing about 12 or 16 years after planting

· this is an export crop and prices can vary due to the fluctuating Australian dollar, and

· generally costs exceed income until the eighth year.

This ruling is made on the basis that your produce growing activity is a business for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10
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

Summary

The Commissioner will not exercise the discretion to allow you to claim the losses from your produce growing business against your other income in the 20XX-XX to 2016-17 financial years, inclusive. The commercially viable period for your produce growing activity is eight years and your business has been operating on both properties for longer than this period.

Disease, staggered planting, lack of fertiliser and the fluctuating Australian dollar are not factors which would warrant the extension of the commercially viable period.

You are required to defer any losses from your produce growing business.

Detailed reasoning

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as either a sole trader or a partner in a partnership and made a loss from that business activity.

Section 35-10 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.

You satisfy the income requirements under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is above $250,000.

If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

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.

You commenced your produce growing business in 19XX when you planted the first property with trees. The business was extended in 20XX with the initial planting of trees on the second property.

You have provided independent evidence that the commercially viable period for your industry is eight years. That is, the period from when the business is commenced to when its income should exceed the expenses attributable to it is eight years.

Both of your properties have operated for more than eight years, therefore you are outside the commercially viable period for your industry.

Diseases, incorrect fertilisation rates and fluctuations in the Australian dollar affecting overseas demand are considered to be normal risks of operating a produce growing business. As such, these do not affect the calculation of the commercially viable period for your activity.

You have planted the second property stages over nine years which has also affected the levels of yield. The decision to plant in stages is a business choice made by you and is not considered to be an inherent characteristic of produce growing (paragraph 78 of Taxation Ruling TR 2007/6). Therefore, the commercially viable period would not be extended by this factor.

The Commissioner will not grant his discretion to allow you to claim losses from your produce growing activity against your other income for the 20XX-10 to 2016-17 financial years, inclusive, as the commercially viable period for your activity has passed.