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Ruling

Subject: non-commercial losses

Question:

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production business activity in the calculation of your taxable income for the 2011-12 to 2013-14 financial years?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts

You and your spouse conduct a primary production business activity under a partnership structure.

In the 2011-12 financial year, you commenced planting fruit trees on the land.

The area in which the land is located is known to be a good area for this type of activity.

No income is expected during the first three years while the land and trees are being established.

The trees are expected to fruit in the forth year, yielding approximately 10% of their maximum production, with maximum production not expected in the 2016-17 financial year.

Your projected profit and loss figures for the 2012-13 to 2016-17 financial years show that your fist crop is expected in the 2014-15 financial year and it is expected to produce over $20,000 in assessable income.

Your income for non-commercial loss purposes was more than $40,000 but less than $250,000 in the 2011-12 financial year and you expect this to be the case in the 2012-13 to 2014-15 financial year as well.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - section 35-10

Income Tax Assessment Act 1997 - section 35-30

Income Tax Assessment Act 1997 - section 35-35

Income Tax Assessment Act 1997 - section 35-40

Income Tax Assessment Act 1997 - section 35-45

Income Tax Assessment Act 1997 - section 35-55

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

· the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your assessable income from sources not related to this activity has been, or is expected to be more than $40,000 for the 2011-12 to 2014-15 financial years. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activities have not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 and are not expected to until the 2014-15 financial year. 

 The Commissioner's discretion - lead time 

The Commissioner's discretion, under paragraph 35-55(1)(b) of the ITAA 1997, can be exercised where a business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests and there is an objective expectation that within a period that is commercially viable for the industry it will meet one of the tests or produce a tax profit.  

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests. 

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The 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. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 

In your case, you commenced planting in the 2011-12 financial year and expect to produce a profit from the activity in the 2014-15 financial year, or five years after you commenced. Your projected profit and loss figures show that you expect to produce income in excess of $20,000 from your first harvest in the 2013-14 financial year, or four years after you commenced. You have not provided independent evidence to show the commercially viable period for your type of industry. However, it is accepted that the commercially viable period for this type of industry can be between three and five 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 satisfy one of the tests in Division 35 of the ITAA 1997 or produce a tax profit.

Therefore, the Commissioner will exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your primary production activities against your other assessable income for purposes of calculating your taxable income for the 2011-12 to 2013-14 financial years.

As your figures show that your activities should produce income in excess of $20,000 from the 2014-15 financial year, the Commissioner cannot exercise the discretion for years beyond the 2013-14 financial year.