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Ruling
Subject: Commissioner's discretion
Question:
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 2009-10 to the 2024-25 financial years?
Answer: Yes.
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
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
Year ending 30 June 2022
Year ending 30 June 2023
Year ending 30 June 2024
Year ending 30 June 2025
The scheme commenced on
1 June 2009
Relevant facts
You commenced your plantation activities in the late 19XX.
You are a member of a number of forestry associations.
Your plantation covers X to X hectares and consists mainly of hardwood timbers grown for sawlogs.
The timber asset assessment of your plantation shows that:
Timber |
$ value per cubic metre |
Estimated yield at 2030 |
Number of trees recovered |
Total $ value |
Species 1 - poles |
50 - 150 |
Whole tree |
600 (30%) |
60,000 |
Species 1 - saw logs |
200 - 400 |
2 cubic metres |
1000 (50%) |
600,000 |
Species 2 |
400 - 800 |
2 cubic metres |
600 (60%) |
720,000 |
Species 3 |
1000 - 1400 |
2 cubic metres |
120 (60%) |
288,000 |
Species 4 |
1000 - 1400 |
2 cubic metres |
120 (60%) |
288,000 |
Total estimated value at 2030 |
$1,956,000 | |||
Although the timber asset assessment report estimates yields at 2030, you intend to commence harvesting in the 2027, with the exception of species 1 - poles, which you intend to harvest in 2025.
The projected value of the species 1 - poles harvest, to commence in 2025, will be in excess of $20,000.
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
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 more than $40,000. 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 2025-26 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 following has been extracted from paragraphs 70 to 104 of this Ruling.
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 one of the tests.
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, your plantation activities commenced in the late 19XXs and you expect to begin some harvesting in the 2024-25 financial year, or approximately XX years after you commenced. You expect to produce income in excess of $20,000 from your plantation activities from the 2025-26 financial year. It is accepted that the commercially viable period for this type of industry can be 28 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 2009-10 to 2024-25 financial years.