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Edited version of your private ruling
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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 activity in your calculation of taxable income for the 2009-10 to 2012-13 financial years?
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
The scheme commenced in
1 July 2009
Relevant facts
You commenced your business activities in 19XX.
Your first produce was ready for sale in 2000.
You sell direct to the public, through mail orders and on a wholesale basis to restaurants in the region.
New facilities and café opened in 2009 to attract passing tourist traffic and has resulted in a dramatic increase in visits and sales.
You have stated that industry research would indicate that it would be seven years plus before a business of your type can expect to break even.
You have provided actual profit and loss statements for the 2002-03 to 2010-11 financial years which show that the activity has not produced a profit, and projected profit and loss statements for the 2011-12 and 2012-13 financial years which show the activity is expected to continue to make a loss in these years.
You expect your business activity to produce a tax profit in the 2013-14 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 to 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 to 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 example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.
In your case, you commenced your primary production activities in 19XX and you do not expect to produce a tax profit until the 2013-14 financial year or 17 years after you commenced. You have stated that industry research would indicate that it would be seven years plus before a business activity of your type can expect to break even. However, you have not provided any independent evidence of the commercially viable period for the industry.
Taking into consideration all the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is 17 years.
The reason your activities are making a loss is peculiar to your situation and is not inherent to the nature of the business.
Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.
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 the 2012-13 financial years.