Edited version of private advice

Authorisation Number: 1012652463906

Ruling

Subject: Non-commercial loss discretion

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 business activity in your calculation of taxable income for the 20XX-XX to 20XX-XX financial years?

Answer: No

This ruling applies for the following period(s)

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a primary production business.

You commenced the business activity in the 200X-0X financial year, at which time you planted your first crop.

You have planted additional crops to this original planning in subsequent years. You anticipated this would increase your crop yields to what you consider full production over several years.

You originally anticipated you would make a profit in the 20XX-XX financial year.

You have not been able to generate a profit from the activity and have requested the Commissioner exercise his discretion for X years until the 20XX-XX financial year.

You attribute you inability to generate a profit due to poor prices and an inability to increase your yield.

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)(c)

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

• you meet the income requirement and you pass one of the four tests

• the exceptions apply

• the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the financial year in question where:

• it is in the nature of your business activity that there will be a period before a tax profit can be produced

• there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.

Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a profit.

This discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, 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.

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.

As an example, in the case of Scott v. Commissioner of Taxation [2006] AATA 542 (Scott's Case), the court upheld the Commissioner's decision in not applying 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 for this activity to require a number of years to come to full production and consequently achieve a profit can be sourced to the decision to stagger the plantings.

Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to make a profit and the Commissioner will not exercise his discretion in this instance.