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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 2010-11 to 2013-14 financial years?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

You commenced a livestock breeding stud in the 2010-11 financial year.

You purchased a foundation herd of pregnant females, as well as a mature male, and a number of offspring have already been produced. Of these, the males are being raised for sale and the females are being kept to build your breeding herd.

In the 2010-11 financial year, you also produced hay, with over 100 bales sold and the remainder held in stock for future sale and on-farm use.

You have previously operated two successful livestock studs. Based on your own experience, you believe it takes three to five years to establish a breeding herd. From the date of purchase of mature breeding stock, 12 months is needed to complete the pregnancy and a further 24 months to raise off-spring to market. To establish on-farm bred females and raise their offspring to market is five years.

You have provided independent comment from another established livestock stud breeder which states that the length of time needed to establish a profitable stud is between three and five years.

You have provided income and expenditure projections which show that your activities are expected to produce a tax profit in the 2014-15 financial year, or five years after you commenced.

Your income for non-commercial loss purposes in the 2010-11 financial year was above $250,000 and you expect this will also be the case in the 2011-12 to 2013-14 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 do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000 in the 2010-11 financial year and you expect this will be the case in the 2011-12 to 2013-14 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.

In your case, it is accepted you commenced your livestock breeding business activity in the 2010-11 financial year and your income and expenditure projections show that you expect your activities will produce a tax profit in the 2014-15 financial year, or five years after you commenced. You have provided independent comment from another established breeder which states that the length of time needed to establish a profitable stud is between three and five years. Your own experience in the industry confirms this time frame.

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 livestock breeding business activity for the 2010-11 to 2013-14 financial years.