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Edited version of your private ruling
Authorisation Number: 1012456304675
Ruling
Subject: Non Commercial losses
Question
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 business activity in your calculation of taxable income for the 2011-12 to 2013-14 financial years?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
The scheme commences on:
1 July 2011
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
· the application for private ruling dated; and
· the documents provided with the application for private ruling.
· You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.
· You carry on a business of growing produce.
· You expect to make a tax profit in the 20XX-XX financial year.
· You have provided independent evidence that states the commercially viable period for your business is X years.
· You operate another business in partnership. According to the profit and loss statement provided, this business has made a profit in the 20XX-YY and 20YY-ZZ financial years.
Relevant legislative provisions
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) and
Income Tax Assessment Act 1997 paragraph 35-55(1)(c).
Reasons for decision
Section 35-1 of the Income Tax Assessment Act 1997 (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 20XX-YY financial year and you expect this will be the case in the 20YY-ZZ and 20XX-YY financial years 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 your 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 your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.
Business activity
You conduct a business in partnership, and as a sole trader. Before we can consider the Commissioner's discretion, we must first establish whether or not you are conducting two separate business activities for the purposes of Division 35 of the ITAA 1997.
Taxation Ruling TR 2001/14 provides a table of relevant factors concerning identifying separate business activities:
Factor |
'for' there being separate and distinct business activities |
'against' there being separate and distinct business activities |
Location |
Different types of activities carried on at different locations |
Different types of activities carried on but all at the same location |
Assets used |
Different types of assets used in carrying on separate activities, with no, or very little, crossover or commonality of use |
Some different assets used in carrying on separate activities but many assets common to all |
Goods/services produced (incl. market conditions) |
Significant differences in the type of goods/services produced from the separate activities and in the conditions affecting their sale |
Different types of goods/services produced but significant similarities in the manner produced and/or marketed |
Inter-dependency |
No, or very little, interdependency between the separate activities |
Separate activities carried on but significant level of interdependency between them in terms, for example, of working capital support, customer base, manner in which activities carried out |
Commercial links |
One set of activities is inherently unprofitable and has no, or only minimal, commercial basis on which it could support the other activities |
One set of activities may be inherently unprofitable but it supports the other activities, for example through increasing their sales base |
Based on the facts and the overall impression, the farming activities you carry out as a sole trader and in partnership are considered to be a single business activity. Therefore, Division 35 of the ITAA 1997 will need be applied to this activity as a whole.
Staggered planting
Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied.
For example, in Scott v. Commissioner of Taxation [2006] AATA 542, the court upheld the Commissioner's decision not to exercise the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years.
The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis.
In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the court expressed the following view:
It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities.
The reason your activities made a loss is peculiar to your situation and is not inherent to the nature of the business. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.
Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2011-12 to 2013-14 financial years.