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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2010-11 financial year?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production 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 2009

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your previous Private Ruling application

· independent reports relating to recent trends in the industry

· your business plan

· profit and loss statements for 2007-08 to 2009-10 financial years and projected income details provided with your original application

· your Private Ruling application

· revised farm income projections, stock movements, depreciation schedule and balance sheet.

You and a relative purchased grazing land some years ago and commenced a business of primary production in partnership.

Due to drought conditions, the partnership sold all the stock.

Your intention is to breed, raise and sell livestock.

In your original ruling application, you stated that for the previous seven years, you endured drought conditions and adverse seasonal conditions, resulting in a reduction of calf production and increased turn-off, causing an overall decline in stock numbers.

You state that it has been only recently (November 2009) that more favourable conditions have encouraged producers to increase purchases and begin re-stocking.

You have provided a copy of your "Business Plan Summary"

You have provided profit and loss statements for the 2007-08 and 2008-09 financial years showing that your income in those years had only comprised agistment income.

You purchased your first stock as a sole trader early in the 2009-10 financial year.

You expected to sell your first stock as a sole trader in the 2011-12 financial year and, pending weather conditions, you expected to purchase additional stock to bring the farm to capacity.

You originally provided the stock movement projections for the 2009-10 to 2013-14 financial years.

For your original ruling, you provided copies of documentation from the Australian Bureau of Agriculture and Resources Economics (ABARE) as independent evidence supporting your claim that drought conditions had applied in prior years.

Your original business plan provided projected income and expenses for the 2009-10 to 2013-14 financial years, showing an expectation that the business would become profitable in approximately 4 years from purchase of your first stock (i.e. the 2013-14 financial year).

You have now provided revised stock movement figures for the 2010-11 financial year and revised projections for the 2011-12 to 2014-16 financial years.

Some stock that you had originally planned to purchase in the 2011-12 financial year will now not be purchased until the 2012-13 financial year.

Your revised figures show an expectation that the business will become profitable in approximately 5 years from purchase of your first stock (i.e. the 2014-15 financial year).

You state that you are primarily responsible for the running of the business.

You have over 30 years of farming experience.

Your adjusted taxable income for non-commercial loss purposes is more than $250,000 in the 2009-10 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2E)

Income Tax Assessment Act 1997 Paragraph 35-55(1)(a)

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 is above $250,000 in the 2010-11 financial year.

In order to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2010-11 financial year, the Commissioner must be satisfied that special circumstances applied and that your business activity would have produced a profit in the year in question, but for the special circumstances.

In your case, you have not demonstrated this for the 2010-11 financial year.

Alternatively, in order to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997, 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.

For the Commissioner to exercise this 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.

You have not provided any evidence from an independent source to establish the commercially viable period for your industry/business. However, the commercially viable period for your industry begins at the start of the activity and includes the time taken to raise females to a breeding age, allowing for the gestation period of those animals to finish, and finishes when the progeny have reached saleable age. The commercially viable period for your industry is generally 2 to 3 years.

In its current form, your business commenced in the 2009-10 financial year.

In a previous ruling we allowed you a period of 4 years as the commercially viable period for your industry as we considered it to be reasonable due to the circumstances of your (previous) case.

In your revised projected income and expenditure statement you have projected that your business activity will not produce income greater than deductions attributable to it until the 2014-15 financial year. This is 5 years after your sole trader business began, which is outside the commercially viable period for your industry/business.

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

On reviewing the information provided, including the stock movement figures, the reason that you will not produce a profit within the commercially viable period is due to decisions you have made with regards to how you run your business rather than due to any inherent features of the industry. That is, another business in the same industry could make a tax profit in a shorter time frame.

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 in relation to your primary production business for the 2010-11 financial year.