Edited version of private advice

Authorisation Number: 1012636802474

Ruling

Subject: Commissioner's discretion - Non-commercial losses

Question and answer

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 forestry activity in your calculation of taxable income?

No.

This ruling applies for the following period

Year ended 30 June 2008 Year ended 30 June 2009

Year ended 30 June 2010 Year ended 30 June 2011

Year ended 30 June 2012 Year ended 30 June 2013

Year ending 30 June 2014 Year ending 30 June 2015

Year ending 30 June 2016 Year ending 30 June 2017

Year ending 30 June 2018 Year ending 30 June 2019

Year ending 30 June 2020 Year ending 30 June 2021

Year ending 30 June 2022 Year ending 30 June 2023

Year ending 30 June 2024 Year ending 30 June 2025

Year ending 30 June 2026

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You commenced the activity under a joint venture agreement (JV) with another party.

A ledger is established to reflect the other party's and your incurred costs.

The other party contributes 100% of the establishment costs of the business activity which is shown on their side of the ledger.

You are paid an annual rental for each hectare of the land which is used for the business activity.

Under the JV it shows you are responsible for the maintenance of product for the business activity.

You are responsible for taxes in relation to the land on which the business activity is conducted.

You do not receive any money from the other party; the amount of rent and expenses incurred from maintenance are notional amounts and are reflected on the ledger against the other party's establishment costs.

You receive a share statement each year.

Your entitlement to the profit or loss is based on your share value as per the notional amounts reflected on your side of the ledger against the other party's establishment costs.

You will harvest in approximately the relevant period when you expect a profit.

The JV shows that the other party;

• is to keep records of all inputs by the parties, the volume and grade of all produce taken and the royalty rates applicable to produce for each harvest. They are also to keep you informed of proposed operations or treatment and organise harvesting and the sale of produce.

• has full free and exclusive right liberty and power from time to time;

• to exercise all the rights as specified,

• to establish, maintain and harvest in the manner detailed in the working plan,

• to store and carry away and sell any produce derived,

• to do all such other acts and things as may be necessary or desirable for the full exercise and enjoyment of its rights under this agreement.

• is to determine what constitutes proper management, although they will consult with you if so requested in writing. If there is work to be performed on the property in respect of the establishment, maintenance and harvesting of the crop they will offer the work to you first.

Your income for non-commercial loss purposes is less than $250,000.

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)

Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision

Carrying on a business

Taxation Ruling TR 95/6 discusses primary production and forestry. Paragraph 4 of TR 95/6 states a person who is engaged in 'forest operations' is a primary producer for income tax purposes if those forestry activities constitute the carrying on of a business.

Paragraph 5 of TR 95/6 defines 'forest operations' in terms of section 6(1) of the Income Tax Assessment Act 1936 (ITAA36) as:

the planting or tending in a plantation or forest of trees intended for felling; or the felling of trees in a plantation or forest.

In terms of TR 95/6, the operations carried out on your property would be considered to be forest operations. However, whether they constitute a business must be considered in terms of paragraphs 86 to 89 of TR 95/6.

Paragraph 87 of TR 95/6 states in determining whether particular activities constitute the carrying on of a business, courts and tribunals have considered the following indicators to be relevant:

n whether the activities have a significant commercial purpose;

n the scale of the activities (a person may carry on a business in a small way);

n the nature of the activities, particularly whether they have the purpose of profit making (however, profit making in a particular year is not essential);

n repetition and regularity of the activities;

n whether the activities are organised in a business-like manner;

n volume of the operations and the amount of the capital employed;

n whether the activities may properly be described as the pursuit of a hobby or recreation;

n the degree of control held by the person over the development and maintenance of the land (Case L1 79 ATC 1; (1979) Case 8 23 CTBR (NS).

In Case L1 79 ATC 1; (1979) Case 8 23 CTBR (NS), the taxpayer entered into an agreement with a management company under which the company was to prepare two hectares of land for planting, to supply radiata pine seedlings and to plant them and thereafter for nine years to tend the area planted. The company further undertook, on request, to cut and market the timber and deliver it to a saw-mill or processor. It was decided the taxpayer was carrying on a business because the management company did the work at the behest of the taxpayer. It was the taxpayer and not the company which was regarded as carrying on the business of afforestation.

Application to your circumstances

The information you have supplied shows you have met some of the above indicators used to determine whether particular activities constitute the carrying on of a business. For example, it is accepted that there is a significant commercial purpose to the activities and that the nature and scale of the activities appear to be sufficient to considered a business.

However some of the indicators have not been met.

The JV shows that the other party conducts the business in accordance with the Deed.

Under the Deed the other party are required to keep records of all inputs by the parties, the volume and grade of all produce taken and the royalty rates applicable to produce for each harvest. This matter is also covered in the Deed which states that the other party keep the owner informed of proposed operations or treatment and organise harvesting.

In terms the degree of control over the development and maintenance of the land the Deed has given control of this to the other party.

The Deed states where any provision of the Deed requires a determination regarding proper management, the other party is to determine what constitutes proper management, although they will consult with you if so requested in writing.

The Deed states that the sale of produce is to be directed and controlled by the other party.

The Deed places restrictions on transfer of title of the land to successors. The Deed states that the rights, duties, obligations and liabilities of the parties are in every case to be several and not joint, nor joint and several. It clearly states that the relationship of the parties is one of co-venturers for the limited purpose of carrying out the project and that neither party has the authority to act for, or to create or assume any responsibility or obligation on behalf of the other party.

The Deed it states if there is work to be performed on the property in respect of the establishment, maintenance and harvesting of the crop, the other party will offer the work to you first at a rate equivalent to the market rate for such work if the other party is of the opinion that you could perform the work to the standard they require. If you do not accept the work, then the other party may undertake the work with State employees or call tenders to perform the work on a contract basis.

The Commissioner's Discretion

The object of Division 35 of the ITAA 1997 is described in paragraph 35-5(1)(a) as improving the integrity of the taxation system by preventing losses from non-commercial activities that are carried on as businesses by individuals being offset against other assessable income.

The establishment costs are funded entirely by the other party which are offset over a period of time by the rent your receive for your land, the costs you incur maintaining the land to the standard required by the other party and the majority of the control and principle decision making is done by the other party.

Therefore applying the indicators of paragraph 87 of TR 95/6 to the role you play in the joint venture it is determined that you are not carrying on a business and section 35-55 of the ITAA 1997 is not applicable.