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Ruling

Subject: Commissioner's discretion

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 primary production business activity in your calculation of taxable income for the 2010-11 financial year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You commenced your primary production activities in 2007.

Your business activity passed the assessable income test, for non-commercial loss purposes, in the 2008-09 and 2009-10 financial years.

You have now sold most of your livestock to fund a change in your activities to breeding sheep for wool.

You now expect to build up your herd and produce wool and lambs for sale annually.

You do not expect to pass the assessable income test for three years while building up your breeding herd.

Your income from sources other than your primary production business activity was more than $40,000 in the 2010-11 financial year.

Your income for non-commercial loss purposes was less than $250,000 in the 2010-11 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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 - Paragraph 35-55(1)(b).

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

§ the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

§ you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

§ if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your business is a primary production activity, however, your income from other sources is more than $40,000. Therefore, the exception contained in subsection 35-10(4) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore, you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2010-11 financial year. 

Commissioner's discretion

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

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's 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 non-commercial loss 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 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 guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. 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 one of the tests. 

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. 

You must be able to show that the reason your business activity has not met the assessable income test is inherent to the nature of the business and is not peculiar to your situation.

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

You state that you changed your business activity from livestock to breeding ewes for wool in the 2010-11 financial year.

The question of whether there are one or separate business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or separate/multiple business activities. These include the location of each activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

In your case, your business activities are carried on at the same location, using the same assets and producing essentially the same products.

Based on the facts and the overall impression, your original livestock business and your current sheep business are not considered to be two distinct business activities but one continuing business activity. As the business has not changed from that commenced in 2007 the lead time of the activity must be taken from that point.

You have stated that your activities will be profitable and pass the assessable income test in three years time, the 2013-14 financial year, or six years after you commenced. You have not provided any projected profit and loss statements to confirm this nor have you provided any independent evidence of the commercially viable period for the industry.

Without this information the Commissioner is not able to conclude that six years is within a period that is commercially viable for your industry. Your own records show that your business activity had passed the assessable income test in the 2008-09 and 2009-10 financial years, or two to three years after you originally commenced.

Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(b) of the ITAA 1997 in relation to your primary production business activity for the 2010-11 financial year.