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Ruling

Subject: Commissioner's discretion

Questions:

1. 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 2011-12 to 2017-18 financial years?

Answer: Yes.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production business activity in your calculation of taxable income for the 2018-19 financial year?

Answer: No.

This ruling applies for the following periods

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

The scheme commenced on

1 July 2009

Relevant facts

You commenced your current primary production activity in the 20XX-XXfinancial year.

The climate in the region where your property is situated is suited to the specialised product you will produce.

You planted X hectares in the 20XX-XX financial year and plan to plant another X hectares of in 2016, with a further X hectares to planted in future years, bring the total area under cultivation to XX hectares.

It is speculated that the first plantings will produce a small amount of produce in year five and commercial quantities after five to seven years of production.

Your projected income and expenditure for the next 10 years shows your activities will produce a tax profit in the 2018-19 financial year.

Your losses, of almost $80,000, in the 2014-15 financial year include approximately $25,000 in additional expenses to plant an additional six hectares.

You have provided independent evidence from an industry expert, who states that production will not commence until year five or six and, under normal conditions, commercial production rates should stabilise by year 11 or 12 of the project.

Your income for non-commercial loss purposes is expected to be above $250,000 in the 2011-12 to 2017-18 financial years.

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 will not satisfy the income requirement as you expect your income for non-commercial loss purposes to be above $250,000 in the 2011-12 to 2017-18 financial years

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 the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

In your case, you commenced your primary production activities in the 20XX-XX financial year with the planting of X hectares of the specialised product. You plan to plant another X hectares in 2016, with a further X hectares to planted in future years, bringing the total area under cultivation to XX hectares.

Your projected income and expenditure figures show that your activities should produce a tax profit in the 2018-19 financial year or ten years after you commenced. You have provided independent evidence which states that production will not commence until year five or six and, under normal conditions, commercial production rates should stabilise by year 11 or 12 of the project.

Generally, where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied. As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542, the court upheld the Commissioner's decision in not applying the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years. The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis.

Your projected income and expenditure figures show that the additional expenses incurred for the additional plantings in the 2014-15 financial year are not the sole cause of your losses in that year and the projected profit in the 2018-19 financial year will be from the original planting, with the first harvest from the subsequent planting not expected until the 2019-20 financial year.

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 produce assessable income greater than the expenses attributed to it.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your primary production activities for the 2011-12 and 2017-18 financial years.

As your figures show that your activities should produce a profit in the 2018-19 financial year, the Commissioner cannot exercise the discretion for this year.