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Ruling

Subject: Commissioner's discretion

Question:

Will the Commissioner exercise the discretion in paragraphs 35-55(1)(a) and (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 2009-10 to 2012-13 financial years?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts

You commenced your farming activities in the relevant financial year under a partnership structure.

Your intention was to sell livestock progeny, and provide agistment.

The region where the property is situated was in drought conditions in the relevant financial year. This limited the properties carrying capacity of the property in the initial years. Increased rainfall and pasture improvements have increased this.

Your original profit and loss statement projected a profit for your activities in the 20XX-XX financial year, or seven years after your business commenced.

You have provided some evidence that the commercial viable period for this type of industry is around eight years based on data taken from ABARE farm surveys.

Under your original business plan, your projected income from agistment was X% of total business income and livestock breeding Y% of total business income in the 20YY-YY financial year.

Your actual and projected profit and loss statement shows your activity would have produced an operating profit from the 20ZZ-ZZ financial year before depreciation. Your interest or borrowing expenses are minimal as most capital expenditure was made out of personal savings.

You have now revised your business plan to reduce the amount of agistment provided and diversified your animal breeding activities.

Under your revised business plan, agistment income has been reduced to W% of total business income and income from animal breeding activities has increased to V% of total income.

New livestock breeding activities have commenced, with the sale of the first progeny sold in the 20XX-XX financial year.

Your other livestock breeding activities have also increased slightly from your original projections, with the property carrying more livestock than originally estimated.

Under your revised profit and loss statements, you now project a profit five years after you commenced.

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)(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 200X-XX financial year and you expect this will be the case in the subsequent financial years as well.

Special circumstances (first limb)

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. For those individuals who do not satisfy the income requirement, special circumstances are generally those which have materially affected the business activity, causing it to make a loss. Special circumstances can include things like droughts and floods (Taxation Ruling TR 2007/6).

Nature of the activity (second limb)

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where 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 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.

Interaction between the limbs

As stated above, ordinarily the operation of the first limb is confined to those situations in which the business activity has been affected by special circumstances outside the control of the operators of that activity where, had these circumstances not existed; the activity would have made a tax profit.

However, the first limb may also apply to a business activity affected by such circumstances during a time when 'because of its nature' it is not able to produce a tax profit, but this time is still 'within [the] period that is commercially viable for the industry concerned'. In such a case, the enquiry is not whether the activity would have produced a tax profit had the special circumstances not existed (paragraphs 35 55(1)(b) and (c) of the ITAA 1997 already recognise that there are reasons outside the control of the operators of the activity why this would not have occurred, regardless of the existence of the special circumstances).

In such cases the appropriate enquiry will be whether or not the special circumstances have meant that there is no longer an objective expectation that within the period that is commercially viable for the industry concerned the activity will produce a tax profit.

Where the special circumstances are the sole reason why the activity can no longer objectively be expected to produce a tax profit within the period that is commercially viable for the industry concerned, but the activity is now expected to consistently produce a profit at some later time, the discretion may be exercised.

In your case, your livestock breeding activity commenced in the relevant financial year during a period when the region in which your property is situated was affected by drought. These conditions affected the carrying capacity of your property during the start-up phase of your business activity. Drought is considered to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. While the drought conditions were not the sole cause of your activities failure to produce a tax profit in the earlier years, it has affected the commercially viable period for your business activity.

Your revised business plan and greater focus on livestock breeding activities means that you now project a profit five years after your business activity commenced.

Taking into account the affects of special circumstances on your activity in the initial years and your increased focus on livestock breeding, the Commissioner is satisfied that 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 paragraphs 35-55(1)(a) and (c) of the ITAA 1997 in relation to your livestock breeding business activity for the subsequent financial years.

As you have stated that your activities should produce a profit in the 20XX-XX financial year, the Commissioner cannot exercise the discretion for this year.