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Ruling

Subject: NCL - Commissioner's discretion - Lead time.

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 primary production activity in your calculation of taxable income for the 2009-10 to 2012-13 income years?

Answer:

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2006

Relevant facts and circumstances

You are conducting a mixed primary production activity as a sole trader.

The business is involved in various activities.

A business activity was previously conducted by a company at the property. The property was subsequently sold to your trustee company. You leased the property from the trustee company to commence a business.

You have stated that you did not have a direct relationship to the company which carried on the business previously and that you only worked on a voluntary basis for that company. However, recently you became more involved with that company.

When the previous company relocated to a different property, you purchased some stock from the previous owners at market value. You purchased further stock from auctions to expand your primary production activity.

You have stated that you were not carrying on the same business as the previous owners and that you commenced a new business activity when you commenced leasing the property. You promoted your stock under a new trade name.

You first sold your stock two years after leasing the property.

You have provided the actual and estimated income and expenditure statements for the relevant income years.

You previously applied for a private ruling in relation to your activity. The Commissioner issued the private ruling and did not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the activity for the relevant income years. The Commissioner stated that you continued the activity of the previous company and therefore, the lead time has lapsed.

You objected against the above private ruling. In the notice of objection you explained that it was not a going concern and that your activity should be considered as a new activity which commenced when you first leased the property.

You have submitted that the commercially viable period for the industry is eight years and have provided independent evidence to support your claim.

You have not satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

You have requested the Commissioner to treat your mixed primary production activity as a new venture and to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to 2012-13 income years.

The Commissioner advised that you have provided new information and requested you to apply for a new private ruling.

You applied for a new private ruling for the mixed primary production activity for the 2009-10 to 2012-13 income years.

Assumptions

None.

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

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain tests) in order to include losses from a business activity in your taxable income calculation. Where the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

In your case, you did not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 in the 2009-10 and 2010-11 income years and you do not expect to satisfy this test in the 2010-12 and 2012-13 income years.

You also do not satisfy the exception in subsection 35-10(4) of the ITAA 1997 as you have received/expect to receive at least $40,000 of non-primary production income in the above income years.

Your primary production activity will only be potentially subject to these provisions if it is carried on as a business. The Commissioner is satisfied that your activity is carried on as a business.

Commissioner's discretion - lead time

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(c) 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 Note to paragraph 35-55(1)(c) of the ITAA 1997 states that the particular paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. The note includes an example of an activity involving the planting of hardwood trees for harvest where many years would pass before the activity could reasonably be expected to produce income.

Paragraphs 77 and 78 of Taxation Ruling TR 2007/6, which discusses non-commercial business losses and the Commissioner's discretion, state:

Therefore, the phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons.

The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity…

You are conducting a mixed primary production activity. The activity has a main component and you are involved in various other components to enhance your income.

From the information you have provided, it is accepted that you have commenced a new business activity. This conclusion is based on the specific facts of your case, including the significance of leasing the property after it was sold by the previous owners to your trustee company. You did not have a direct involvement with the previous company which carried on the business. It is also noted that you have only purchased minimal stock from the previous company at market value. Subsequently you purchased further stock to supplement your income.

Commercially viable period for a mixed primary production activity.

You expect to generate a profit in the 2013-14 income year.

Your activity consists of various components. You submit that the commercially viable period for your main component is eight years.

The lead time to generate income from these various components range from two to three years. You have derived income from the main component two years after leasing the property. This is evidenced by the income and expense statements you have provided. One of the components generates income within 12 months.

Therefore, the evidence you have provided for the main component is not necessarily sufficient for us to accept that the appropriate period of commercial viability for the mixed primary production activity would extend out to 8 years; however, you have stated that you expect to produce income greater than the deductions attributable to it in the 2013-14 income year.

Based on your projections, it is considered reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your mixed farming activity for the 2009-10 to 2012-13 income years.

In view of the above, the discretion under paragraph 35-55(1)(c) will be exercised for the 2009-10 to 2012-13 income years so that losses made in those years need not be deferred.

Summary of reasons for decision

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 in relation to your mixed primary production activity for the 2009-10 to 2012-13 income years on the basis that, from the evidence you have provided:

· your business activity is carried on by you as a business;

· you had actually commenced this business activity;

· it is because of the nature of the activity that you were not able to produce income greater than deductions attributable to it until the 2013-14 income year; and

· there is an objective expectation that the mixed farming activity will produce income greater than the deductions attributable to it within the commercially viable period for that industry.

ATO view documents

Taxation Ruling TR 2001/14.

Taxation Ruling TR 2007/6.

Other references (non ATO view, such as court cases)

EM - Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009