Edited version of private ruling

Authorisation Number: 1011888188364

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Ruling

Subject: Commissioner's discretion

Questions

1. Will your plantation activities be considered to be carrying on a business?

Answer: Yes

2. Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your plantation activities in your calculation of taxable income for the 2011-12 to the 2015-16 financial years?

Answer: Yes.

This ruling applies for the following periods

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

The scheme commenced on

1 July 2011

Relevant facts

You intend to commence your plantation activities, as a sole trader, in the 2011-12 financial year.

Your plan is to grow four or five commercial species with harvesting periods expected to commence in about year seven.

Three species will be grown for furniture making while others will be grown for chipping to produce earlier returns.

Land has been sourced but not yet purchased.

Your projected income and expenses statement shows that you expect to produce income in excess of $20,000 a year from the 2016-17 financial year.

Your income for non-commercial loss purposes is over $40,000 but below the $250,000 threshold.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35
Income Tax Assessment Act 1997 - section 35-10
Income Tax Assessment Act 1997 - section 35-30
Income Tax Assessment Act 1997 - section 35-35
Income Tax Assessment Act 1997 - section 35-40
Income Tax Assessment Act 1997 - section 35-45
Income Tax Assessment Act 1997 - section 35-55

Reasons for decision

Carrying on a business

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation, or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Applying the indicators to your circumstances

Significant commercial purpose or character

You have developed a business and sourced land on which to start your plantation. You have researched the best species of trees to grow in region where the property is situated as well as possible markets for the products you intend to produce. You also have a reasonable belief that the activity is likely to generate a profit in the future.

More than just an intention to engage in business

You have shown more than just an intention to engage in business. You have also completed a Certificate in Small business Management.

Purpose of profit as well as a prospect of profit

You have shown that while your activities will not produce a profit in the short term, the activity will be profitable long term.

Regularity and repetition

You intend to devote 50% of your time to the work operations and management of the business.

Same kind and carried on in a similar manner to that of ordinary trade

You have some previous experience as an agri-business operator in commercial flower production. The business you propose will be carried on over 50 hectares and will eventually produce over 30,000 trees.

Planned, organised and carried on in a business like manner

Your business plan shows you have researched the markets and possible returns of what you are proposing. You have prepared projections of expected income and expenses from the activity and detailed how these costs will be met.

Size, scale and permanency

The size and scale of what you are proposing maybe small in comparison to other primary production activities.

Better described as a hobby, recreation, or sporting activity

Your activities would not be described as a hobby or recreational pursuit.

Considering all the indicators in combination and as a whole, your plantation activities would constitute a business if carried out as you have proposed in your business plan.

Non-commercial loss provisions

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

· the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your assessable income from sources not related to this activity is expected to be more than $40,000 for the 2011-12 to 2015-16 financial years. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activities are not expected to satisfy any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 until the 2016-17 financial year. 

The Commissioner's discretion - lead time 

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

· the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and  

· there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year.  

Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying tests 1 to 4. 

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 

In your case, you expect to begin planting in the 2011-12 financial year and expect to begin some harvesting in the 2016-17 financial year, or six years after you commenced. You expect to produce income in excess of $20,000 from your plantation activities from the 2016-17 financial year. You have not provided independent evidence to show the commercially viable period for your type of industry. However, it is accepted that the commercially viable period for this type of industry can be six years or more.

Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will satisfy one of the tests in Division 35 of the ITAA 1997 or produce a tax profit.

Therefore, the Commissioner will exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your plantation activities against your other assessable income for purposes of calculating your taxable income for the 2011-12 to 2015-16 financial years.