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Ruling

Subject: Non-commercial losses - Commissioner's discretion - lead time

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your forestry activity in your calculation of taxable income for the 2010-11 to the 2017-18 income years inclusive?

Answer

Yes.

This ruling applies for the following period

1 July 2010 to 30 June 2018

The scheme commenced on

1 July 2010

Relevant facts

The business to be undertaken is that of forestry growing and harvesting.

You will be the principal operator of the property but will receive support from consultants as required, plus contract labour and support from skilled family connections that have had experience in many facets of this proposed venture.

You have provided evidence of work that has been carried out with copies of invoices and recommended plans. This entails: Forest practices plan, report and mapping, bulldozer and excavator hiring, burning plan and burning, purchase of trees, cost of cultivating/fertilizing/planting.

The consultants have provided information that thinning will occur in year X producing some income and the clearfell of this forest will occur in year X when the trees are mature.

Your adjusted taxable income for non-commercial losses purposes is less than $250,000.

Relevant legislative provisions

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

Summary

There is an objective expectation that your business activity will produce a taxation profit by the 20XX income year, X years after planting your trees, within a commercially viable period for your industry. Therefore, the Commissioner's discretion has been granted for the 2010-11 to the 2017-18 income years.

Detailed reasoning

Carrying on a business

The question of whether you are carrying on a business is a question of fact and degree. There are no hard and fast rules for determining whether your activities amount to the carrying on of a business. The facts of each case must be examined. In Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, Webb J said:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However the courts have developed a series of indicators that you can apply to your circumstances to determine whether you are carrying on a business. Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?' summarises these indicators. No one indicator is decisive. The indicators must be considered in combination and as a whole.

Based on the information you supplied, your forestry activity can be said to have commenced as a business from the 2010-11 income year.

Commissioner's discretion - lead time 

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioners 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 the Commissioner's interpretation of the exercise of the discretion under paragraph 35-55(1)(b) of the ITAA 1997. 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 tests 1 to 4. 

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. 

It is accepted that it is in the nature of your activity there will be a lead time before a profit can be expected or one of the tests passed. For this reason, your activity has not previously satisfied one of the tests and will not satisfy one of the tests in the 2010-11 to the 2017-18 income years, except in the years in which thinning occurs.

The information you have provided demonstrates that there is an objective expectation that your business activity will produce a taxation profit by the 20XX income year, X years after planting your trees. It is further accepted that producing a profit within X years of planting will be within a commercially viable period for your industry.

Therefore, the Commissioner's discretion has been granted for the 2010-11 to the 2017-18 income years.