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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 livestock business activity in your calculation of taxable income for the 2009-10 and 2010-11 financial years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You commenced your livestock business activity in the 2003-04 financial year with the initial purchase of a small property.

In the following year, an additional property was purchased and you commenced a small commercial livestock operation.

In the 2007-08 financial year, anther property was purchased along with additional livestock.

In the following year, another property was leased to supplement your landholdings.

During the 2009-10 financial year, a decision was made to commence a breeding program to improve the quality and consistency of your livestock to meet the demands of the overseas markets. Your plan was to achieve cross breed animal which was able to be certified as 95% pure breed as required for sale to overseas markets at a premium.

You purchased X pure bred males, along with a further X pure bred breeding females. These purchases supplemented your existing breeding herd of predominantly pure bred and cross bred livestock. Your existing herd was sifted to identify older breeders, those that did not fit the new 95% breed threshold and those with a lower progeny survival rate. These animals were culled from the herd and sold.

You have provided independent evidence which suggests that the commercially viable period for this type of industry is five years.

Your profit and loss forecasts suggest your business activities will produce a tax profit in the 2011-12 financial year.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $250,000.

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 2009-10 and 2010-11 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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as a consequence of starting out on a small scale, the hours worked or the need to build a client base. 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.

You have stated that you commenced your livestock business activity in the 2003-04 financial year. During the 2009-10 financial year, you commenced a breeding program to achieve cross breed animal which was able to be certified as 95% pure breed, as required for sale to overseas markets at a premium, using your existing breeding herd along with X pure bred males, along with a further X pure bred breeding females purchased in that year.

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

The question of whether there are one or multiple 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 of 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 livestock business activities, prior to and post the 2009-10 financial year, are carried on at the same locations, using the same assets and producing essentially the same products. Although you have stated that you are now raising animals able to be certified as 95% pure bred for sale to the more lucrative overseas markets, you are essentially still raising the same breed of animals for sale. While you did purchase a small number of pure bred animals, these purchases simply supplemented your existing breeding herd.

Based on the facts and the overall impression, your original business and your current 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 the 2003-04 financial year, the commercially viable period of the activity must be taken from that point.

You have stated that your activities will produce a tax profit in the 2011-12 financial year, or nine years after you commenced. You have provided independent evidence which suggests that the commercially viable period for this type of industry is five years.

Where a business does not produce a profit within the commercially viable period for the industry, the Commissioner is not able to exercise the discretion.

The reason your activities continue to make a loss is peculiar to your situation and is not inherent to the nature of the business.

Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 and 2010-11 financial years.