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Edited version of your private ruling
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Ruling
Subject - Non-commercial loss - lead time
Questions:
1. 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 primary production business activity in your calculation of taxable income for the 2009-10 to 2010-11 financial years?
Answer: Yes.
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 business activity in your calculation of taxable income for the 2011-12 financial year?
Answer: No.
This ruling applies for the following period
Year ended 30 June 2010
Year ended 30 June 2011
Year ending 30 June 2012
The scheme commenced on
1 July 2009
Relevant facts
Your primary production business activity commenced in the 2007-08 financial year.
The business activity has produced an overall loss in the 2008-09, 2009-10 and 2010-11 financial years
Projected income and expenditure figures show that the business is expected to produce an overall profit from the 2011-12 financial year.
Independent evidence provided states that the commercially viable period for this type of business is three to four years.
The activity satisfied the real property test for non-commercial loss purposes in the 2008-09 financial year.
Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $250,000 and you expect this will be the case in the 2011-12 financial year 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 $250,000 in the 2009-10 and 2010-11 financial years and this is expected to be the case in the 2011-12 financial year 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 the 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 the business activity is producing a loss is inherent to the nature of the business and is not peculiar to the taxpayer's situation.
In your case, you commenced your primary production business activity in the 2007-08 financial year and the activity has produced an overall loss in the first three years of operation. Projected income and expenditure figures show that the business is expected to produce an overall profit from the 2011-12 financial year.
Independent evidence has been provided which states that the commercially viable period for the business is three to four years.
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 primary production business activity for the 2009-10 and 2010-11 financial years.
As your figures show that your activities should produce a profit in the 2011-12 financial year, the Commissioner cannot exercise the discretion for this year.