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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 2010-11 financial year?
Answer: Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You conduct your farming business on a property of more than X,000 acres purchased in 20XX.
You began working full time as a farmer from 1 January 20XX and you expect to produce income from lambs, wool and crops.
Sheep have a five month gestation period and the lambs are sold at between five and twelve months of age. The farm sheep have produced lambs in the past few months and you intend to sell most of these lambs in the 20XX-XX financial year.
Your sheep will be shorn annually in January, with the first season in 20XX.
You planted crops in April-May 20XX, which is expected to yield 200 tonnes and be sold in November- December 20XX.
You expect to produce a profit in the 20XX-XX financial year.
You have provided independent evidence to support your income projections.
Your income for non-commercial loss purposes in the 2010-11 financial year was above $XXX,000.
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 was above $250,000 in the 2010-11 financial year
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 farming activities in the 2010-11 financial year. Your farming activities include:
o breeding sheep, with the lambs sold for meat. This requires time for joining ewes to a ram, five months gestation, and the lambs sold at between five and twelve months of age
o wool production, with sheep shorn annually in January. The first season will be in 2012; and
o crops, sown in April-May of one financial year and harvested in November-December of the next.
You expect your activities to produce a tax profit in the 2011-12 financial year, or the year after you commenced.
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 business activity for the 2010-11 financial year.