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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 livestock activity in calculating your taxable income for the 2009-10 to 2011-12 years of income?

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 livestock activity in calculating your taxable income for the 2009-10 to 2011-12 years of income?

Answer

No.

Question 3

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 affiliated livestock activity in calculating your taxable income for the 2009-10 to 2012-13 years of income?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010
Year ended 30 June 2011

Year ended 30 June 2012
Year ended 30 June 2013

The schemes commenced on

Livestock

1 July 1971

Affiliated livestock

30 May 2005

Relevant facts and circumstances

You commenced your primary production business in the 1970s. There has been acquisition of land and livestock, together with improvements necessary for incremental improvements and facilities to produce a long term increase in the returns from your business.

You have reinvested the proceeds from the business back into the business, together with continued additional investment of capital. As a matter of strategy, you have continued landholding expansion that includes geographical spread and increasing economies of scale.

You have made significant input into livestock improvements. You have a focus on increased productivity by utilisation of performance testing, breeding technology, and environmental improvement and drought strategies.

Landholding

There has been a progressive increase in your holdings by acquisition of adjoining properties to give local economies of scale, and district diversification for variation of climatic conditions.

Livestock Holding

Livestock holding have been expanded over the years and are presently cash flow positive.

Management

Your enterprises are unified and run with the same management, staff and plant. Stock is transported between properties and farming carried out on each of the properties to compliment different aspects of the business.

Viability

Each of the enterprises have become cash flow positive after the normal lead time associated with each enterprise.

There are unrealised capital gains in the landholdings which would be payable on sale of those holdings. Sale is not a consideration at this stage of the operation. You have sold one property in the last 40 years.

Drought

The total business cash-flow has been positive in the majority of last nine years. Those years that were not, were those associated with drought declared declaration in the area together with significant drought feeding expense

The effects of drought were:
(a) Reduced average revenue from sales when compared non-drought years.

(b) Increased costs.

With the passing of the drought in 2009 there is a return to normal positive cash flow which increased again in 2010, with the trend continuing in 2011.

The drought has affected the business during the period of expansion and consolidation. The trading operations are cash flow positive, but due to the concessions and the drought the reported taxable income from the livestock enterprise is negative.

Affiliated livestock

It is not a hobby but a fully considered, investigated and funded business, and is expected to be viable in the normal lead time of the industry. An independent source stated that your affiliated livestock enterprise would meet the industry lead time of seven to nine years.

Nature of affiliated livestock

The minimum time from acquisition to sale is seven to eight years. Depreciation is allowed under tax schedules and has a direct relationship to the amount invested. It is anticipated initial production sales will occur in the 2012-13 year and increase in subsequent years. It is anticipated to show a tax profit in the 2013-14 year of income.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)
Income Tax Assessment Act 1997 subsection 35-10(1)
Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision

Livestock special circumstances

You have applied for the Commissioner's discretion - special circumstances, with regard to your losses for the 2009-10 to 2011-12 years of income. You do not have access to the assessable income test, profits test, real property test or the other assets test. Also, the exception for primary producers does not apply

Paragraph 35-55(1)(a) of the ITAA 1997 provides that the Commissioner can exercise the discretion where certain special circumstances apply. 'Special circumstances' are those outside of the control of the operators of the business activity, including drought, bushfire and other natural disasters.

To apply the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity is affected in the relevant year by the special circumstances. Unfavourable weather condition leading to drought was outside your control and therefore it is accepted as a special circumstance as this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

Paragraph 13A of Taxation Ruling TR 2007/6 explains that the Commissioner may exercise the discretion if special circumstances exist and a tax profit would have been made but for those special circumstances.

In your case you have calculated the effects of the drought through decreasing income and increasing expenditure for the 2005-06 to 2009-10 years of income. After applying these amounts the result shows that a tax profit would not have been made in any of those years, but for the drought. As the drought ended in 2009 and there was no decreasing income and increasing expenditure evident the special circumstances are not applicable for the 2009-10 to 2011-12 income years. The Commissioner will not exercise the discretion for the 2009-10 to 2011-12 years of income under paragraph 35-55(1)(a) of the ITAA 1997 and the losses from your livestock business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

Commercially viable period

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.

· for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C).

The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement.

Livestock enterprise

You have provided a letter from a stud stock specialist stating that the industry average takes up to ten years from commencement to be viable. The period that is commercially viable for the industry concerned is taken from the commencement of the activity. Therefore the commercially viable period as described by the industry specialist has passed.

The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for your livestock enterprise for the 2009-10 to 2011-12 years of income and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

Affiliated livestock enterprise

You have supplied evidence from an independent source which has established that the commercially viable period for this industry is from seven to nine years. You have projected and stated that your enterprise will produce assessable income greater than the deductions attributable to it in the 2013-14 year of income. This is within the commercially viable period as presented by the independent source for this industry.

Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from this enterprise to be included in the calculation of your taxable income for the 2009-10 to 2012-13 years of income.