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Ruling

Subject: Non commercial losses - Commissioner's discretions

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 activity in your calculation of taxable income for the 2009-10 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You set up a vineyard in 19XX.

You planted additional grapevines over a number of years:

Your first crop was in 2002 and was sold.

In 2005 you marketed under your own label.

According to the Production guidelines for Australian table grape varieties Agricultural notes dated February 2002 "for most varieties it will take 4-5 years for full production".

It takes as much as six years before wine can be sold.

You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year.

Relevant legislative provisions

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

Reasons for decision

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 exceptions 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 any of the exceptions. 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.

In your case, you commenced the business in 1998. While it is accepted that you have planted a large number of vines since the initial plantings on the property, you have purchased equipment to manage the vines and you commenced making your own wine instead of selling the grapes, this does not affect the lead time allowable for making a tax profit.

The lead time that is accepted for your activity would be a maximum of 11 years. That is, 4 to 5 years until the grapes are at full production and up to six years until the wine is sold. This means that the commercially viable period for your activity would have expired by 2009.

It is considered that the reason your activity will not make a tax profit in a commercially viable period is because of the costs involved in purchasing equipment and also planting additional vines and not because of the nature of the activity.

Therefore, the Commissioner can not exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business for the 2009-10 financial year as the commercially viable period has expired.