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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 breeding business activity in your calculation of taxable income for the 2009-10 and 2012-13 financial years?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced in

Year commencing 1 July 2002

Relevant facts

Your business activity is conducted over three properties.

You have stated that from the time of purchase in 2001, the property has always raised livestock and that these activities have evolved towards a more complicated, highly technological approach which provides higher financial margins.

The business has developed a scientific approach which allows you to market higher quality animals. The properties' small size and fertile pastures allow for close supervision of the animals.

Your main clientele are commercial breeders and abattoirs.

Your actual and budgeted livestock sale figures for the 2007-08 to 2013-14 financial years show the highest average price received to date per head is less the $X but you project that by the 2013-14 financial year the average price will be over $X.

You actual and projected sales figures breakdown for the 2010-11 to 2013-14 financial years show that stud males had and average sale price of $X in the 2010-11 financial year but you project this will increase to an average of $X per head in future years with 20 sales projected at this price in both the 2012-13 and 2013-14 financial years.

Your projected income and expenditure figures show you expect to produce a profit of less than $X in the 2012-13 financial year and a profit of less than $X in the 2013-14 financial year.

You have not provided any independent evidence of the commercially viable period for this type of industry but you have stated there is a five to six year breeding lead up time.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $X and you expect this will be the case for the 2011-12 and 2012-13 financial years as well.

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 $X in the 2009-10 and 2010-11 financial years and you expect this will be the case in the 2011-12 and 2012-13 financial years as well.

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 since purchasing your first property in 2001, you have engaged in commercial livestock business activities and that these activities have evolved towards a more complicated, highly technological approach which provides higher financial margins. The business has developed a scientific approach which allows you to market higher quality animals.

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. (Taxation Ruling TR 2001/14)

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; that being livestock for sale. Although you have stated that your activities have 'evolved' to your current, highly technological approach to breeding livestock, you are essentially still raising livestock for sale.

Based on the facts and the overall impression, your original business activities that commenced in 2001 and your current business are not considered to be two distinct business activities but one continuing business activity which, as you have stated, has evolved to its current position. As the business has not changed from that commenced in 2001, the commercially viable period of the activity must be taken from that point.

Your income and expenditure projections indicate that your activities will produce a tax profit in the 2012-13 financial year, or 12 years after you commenced. You have not provided any independent evidence of the commercially viable period for the industry.

Without this information the Commissioner is not able to conclude that 12 years is within a period that is commercially viable for your industry. You have stated that the breeding lead up time is a five to six 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.

Even if it was accepted that the commercially viable period for your industry is 12 years, there are concerns as to whether your activities would actually achieve a profit within that timeframe. Your projected income figures rely on you being able to achieve an average of $X per head for 20 stud males in both the 2012-13 and 2013-14 financial years while your actual figures to date show an average of just $X per head being achieved. With profits of less than $X being projected in each of these years, even a small reduction in the average price will result in an overall loss. Based on this, the Commissioner is not satisfied that your income projections are achievable.

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 to 2012-13 financial years.