Edited version of private advice

Authorisation Number: 1051862958446

Date of advice: 16 July 2021

Ruling

Subject: Non-commercial losses - lead time

Question One:

Will the Commissioner exercise the discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the 2020-21 financial year?

Answer

No

Reasons for decision

Non-commercial losses

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 satisfy the income requirement and you pass one of the four tests
• the exceptions apply
• the Commissioner exercises his discretion.

However, for this Division to apply, your activity should be carried on as a business.

When does a business activity commence?

Taxation Ruling TR 97/11 provides the factors that the Commissioner's considers when looking at whether an entity is in business.

The actual date of commencement of a business activity is a question of fact (Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26) (Goodman Fielder Wattie).

For a business activity to have commenced a person must have:

• purpose, intention and decision to commence the business activity
• acquired a minimum level of business assets to allow that business activity to be carried on, and
• actually commenced business operations (Calkin v. CIR [1984] 1 NZLR 440).

We must examine the above indicators in light of the characterisation of your business activity.

Purpose, Intention and Decision

The intention and purpose of a taxpayer in engaging in an activity is relevant to when a business commences. However, an intention to commence a business will not determine that the business activity has actually commenced.

The chain of events leading to the commencement or start-up of a business activity often begins with a mere intention to establish the business activity. This is developed by researching the proposed business and, in some instances, by experiment. This process culminates in a final decision on whether to commence business. However, not all businesses commence in such an orderly manner.

Acquisition of a minimum level of business assets to allow that business activity to be carried on

Most business activities have a structure that provides the framework of the business. It is usually a collection of capital assets. What the particular capital assets are will depend on the particular business activity.

In Calkin v. CIR [1984] 1 NZLR 440 Richardson J said at 446-447:

Clearly it is not sufficient that the taxpayer has made a commitment to engage in business:he must first establish a profit-making structure and begin ordinary business operations.

For a business activity to commence, an appropriate business structure should be in place and begin ordinary business operations.

As to what the business structure will consist of, and its size, will be a question of fact and degree, and will depend on the nature of the business activity.

Commencement of Business Operations

As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

Business commencement

It is clear from the information you have provided that your intention is to engage in business of primary production.

In your situation you intend to purchase the land and assets required to carry on a business of primary production however, the sale has not settled during the relevant financial year. These aspects of the business make up the profit-making structure required to engage in ordinary business operations and are essential for generating income.

It is accepted that although you did not own the land or assets of the business, the intention to engage in business is present as you have sought permission from the current owner to access the property to tend to the crop prior to the sale of the business. However, because you do not own the land or assets there is no profit making structure to your business and there is no way to produce business income as you would not be entitled to any income received in the relevant income year.

Given that facts and circumstances of the matter it is considered that you have not commenced the business activity during the 20XX-XX financial year. As you do not satisfy the requirement of being in business you are not eligible to consider the non-commercial loss provisions.

Note that under the non-commercial loss provisions, lead time would not usually be considered by the Commissioner for the purchase of an existing established business.

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commences on:

XXXX

Relevant facts and circumstances

You are a resident of Australia for tax purposes for the 20XX-XX financial year.

You are purchasing a farm.

The land is being purchased by yourself and your spouse.

The contract of sale has not yet settled.

You will operate the business as a sole trader and you will be conducting a primary production activity.

The property is a mature business which will be immediately commercially productive where the produce is grown and ready to be harvested.

You have been granted permission by the current owner to tend to the crops prior to settlement of the contract.

The estimated that you will make a profit in 20XX-XX year.

The first expected income for the farm will be in July 20XX.

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)