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Ruling

Subject: 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 business in your calculation of taxable income for the 2009-10 to 2012-13 financial years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

30 June 2009

Relevant facts

You have conducted your primary production business activity for a number of years.

In recent years, a sub-division development was undertaken on part of the land which resulted in the removal of more than half of your primary production trees. These trees have been replaced with new plantings.

The property now has some mature trees but more than half your trees are younger trees which are not expected to reach maturity for another eight years.

Your business activities have not made a profit to date but you anticipate you will now produce a tax profit in the 2017-18 financial year.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $250,000 and you expect this will be the case for the 2011-12 and 2012-13 financial years as well.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

Section 35-1 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. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 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 in the 2009-10 and 2010-11 financial years and you expect this will be the case in the 2011-12 and 2012-13 financial years as well.

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 (paragraph 35-55(1)(c) of the ITAA 1997).

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.

In your case, you commenced your primary production business a number of years ago. The property had approximately 1,500 mature primary production trees until recent years, when more than half trees were removed as a result of a sub-division development carried out on part of the land. These trees have now been replaced with new plantings. The property now has some mature trees but more than half your trees are younger trees which are not expected to reach maturity for another eight years. While your primary production business activities have not made a profit to date, you anticipate they will now produce a tax profit in the 2017-18 financial year.

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 removed more than half of your mature trees to make way for a sub-division development and replaced them with new plantings that are not expected to reach maturity for another eight years.

The reason your activities made a loss is not inherent to the nature of the business but is peculiar to your situation.

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 for the 2009-10 to 2012-13 financial years.