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Ruling

Subject: Non commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) (lead time) to allow you to include your share of the losses from the 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 on:

1 July 2009

Relevant facts and circumstances

You do not satisfy the <$250,000 income requirement for non-commercial loss purposes.

The business is conducted as a partnership by you and another partner.

The enterprise operates from a number of properties.

In the initial year you purchased your first property:

· to develop a viable cattle herd;

· to prove up a herd of thoroughbred bloodstock mares;

· to establish a thoroughbred breeding stud farm; and

· to pursue associated activities e.g. agisting animals and cash cropping etc;

In that year you also commenced gorse removal and pasture development; and you purchased stud bulls and cattle for herd establishment.

You purchased the property in an extremely run down state as it had been lain fallow for many years.

Since purchasing the first property you set about improving pasture development, commenced the first of major fencing works, commenced the first major works on water facilities including the construction of a large dam, purchased bloodstock as the first step in developing a herd for breeding and some fillies for racing to establish credentials and had your first cattle and horse sales.

In the following years you received prizemoney from racing, engaged the services of an experienced farm/stud manager and purchased a further property to enhance stock capacity and the ability to grow crops for fodder and reduce costs.

In recent years you redeveloped the stud house, erected major specialised fencing, shed and barn improvements, purchased another property for cropping and agistment, continued racing selected fillies and retired other fillies to bloodstock or sold them.

You stated that in your industry, the accepted number of years before an activity becomes commercial viable is 8 years. You have predicted that you won't be able to make a tax profit for 10 years from the commencement of the business.

The primary purpose of the business is the development of a world class horse breeding stud.

Relevant legislative provisions

Income Tax Assessment Act Subsection 35-10(2)

Income Tax Assessment Act Subsection 35-10(2E)

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

Reasons for decision

Summary

It is considered that the length of time your business activity will require to make a tax profit is not simply a result of the nature of the activity. Rather your individual circumstances have materially affected the period that will elapse before a tax profit is made, for example, your choice to acquire a property in a run down state.

Also, you have not shown that your business will produce a tax profit within the commercially viable period for the industry concerned. Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business activity for the 2009-10 to 2012-13 financial years. Consequently, any losses from your activity in these financial years are required to be deferred.

Detailed reasoning

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.

You have requested the discretion on the basis of the nature of your activity. The discretion is contained in paragraph 35-55(1)(c) of the ITAA 1997.

Applying the criteria in this paragraph, the discretion can only be exercised if:

(1) It is the nature of the business activity that has prevented, or will prevent, it from producing a tax profit in each of the 2009-10 to 2012-13 financial years; and

There is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.

It is clear that your activity is a business and that you intend to invest the resources and time necessary until it eventually makes a profit. However, this is not sufficient for a discretion to be exercised. You must be able to show that it is the nature of the activity that has caused or will cause it to make a loss in the 2009-10 to 2012-13 financial years and that it will make a tax profit within a commercially viable period for the industry.

It is accepted that it is in the nature of your activity that there will be some period before a tax profit can be produced. However, the substantial length of time that you will need to make a profit from your activity is not considered to be simply a result of the nature of the activity. Rather it is considered that your individual circumstances have increased the time it would take to make a tax profit, for example, your choice of purchasing a run down property.

You also stated that in your industry, the accepted number of years before an activity becomes commercial viable was 8 years. You project that you will not make a tax profit within this period.

Therefore, the Commissioner will not exercise his discretion for the 2009-10 to 2012-13 financial years. As a result you are required to defer the losses from the business activity in those years.