Edited version of your written advice

Authorisation Number: 1012996470114

Date of advice: 14 April 2016

Ruling

Subject: Non-commercial losses - lead time

Question

Will the Commissioner exercise the discretion in paragraph 33-55(1)(b) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business in your calculation of taxable income for the income tax years ended 30 June 20YY to 30 June 20ZZ inclusive?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The following documents you provided form part of the scheme under consideration:

• your private ruling application

• evidentiary checklist

• your business plan

You operate a primary production business. You have provided details of your activity including the commencement date, location and scale of operations.

You have satisfied the income requirement in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997). You state your primary production business has not satisfied and will not satisfy any of the tests set out in sections 35-30 (assessable income), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) of the ITAA 1997 until the 20ZZ-AA financial year.

Relevant legislative provisions

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 and

Income Tax Assessment Act 1997 - Section 35-55.

Reasons for decision

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the 2001-01 income year and subsequent income years. As your activity has commenced, and you state that it is carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

• the exception in subsection 35-10(4) of the ITAA 1997 applies

• one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met (refer below), or

• if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

In broad terms, the tests require:

• at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)

• the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

• at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

• at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

In your situation the exception would not apply, and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised where the income requirement in subsection 35-10(2E) of the ITAA 1997 is satisfied and the business activity has started to be carried on; and for those income years:

• because of its nature it has not met one of the tests set out in Division 35 of the ITAA 1997, and

• there is an expectation that the business activity will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

Having regard to your full circumstances, it is accepted that it is the nature of the business activity that has prevented one of the four tests from being passed. It is well established in your industry that the lead time is between 18 months to 24 months. You advise that your business will satisfy the assessable income test in section 35-30 of the ITAA 1997 in the 20ZZ-AA financial year based on current auction prices for cattle.

Therefore, the Commissioner's discretion will be granted for the years ending 30 June 20YY and 30 June 20ZZ. This means that any 'loss' for the activity can be taken into account in calculating your taxable income for those years.