Edited version of private advice

Authorisation Number: 1051922015497

Date of advice: 15 November 2021

Ruling

Subject: Non commercial loss - lead time

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA1997) to allow you to include any losses from your business activity in your calculation of taxable income for the 2021 financial year?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

XX XX 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 premium distillery business.

Your business operations commenced in the XXXX financial year.

You have provided independence evidence that in conjunction with independent research has attested to a commercially viable period of nine years for your industry.

You intend to make a profit in the XXXX financial year.

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

The discretion under lead time is intended to cover business activities which, by their nature, require a number of years to produce assessable income. Examples of activities which would fall into this category are forestry, viticulture and certain horticultural activities (paragraph 1.51 of the Explanatory Memorandum for the New Business Tax System (Integrity Measures) Act 2000).

The discretion is not intended to be available in cases where the failure to make a profit is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - para 2.35 of the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009.

Paragraph 16B of Taxation Ruling TR 2007/6 Income Tax: non-commercial business losses: Commissioner's discretion states: The Commissioner may, on application, for an individual who does not satisfy subsection 35-10(2E) exercise the discretion in paragraph 35-55(1)(c) for a business activity that has started to be carried on, where, for the income year(s) in question:

•                 'because of its nature', it has not, or will not produce a tax profit; and

•                 there is an objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will produce a 'tax profit'

Regarding the first element, the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type (see Federal Commissioner of Taxation v Eskandari (2004) 134 FCR 569). Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business.

As shown by the industry analysis and the independent evidence you have supplied, the appropriate time to age your product has a large variation. Whilst the Australian legal minimum is 2 years, with general industry consensus of what is ordinary industry practice indicates a longer time period is more appropriate. On balance, a period between XX-XX years seems most appropriate. This also reflects the year at which sales are first being made by the business.

The period to be commercially viable is not simply a calculation of how long it takes a product to be available to create assessable income. This is seen by Bentivoglio v Federal Commissioner of Taxation [2014] AATA 620 where the commercially viable period for olive growing and production was accepted as 10 years, despite olive trees taking 3-5 years to produce their first harvest.

Independent evidence has suggested that, the period to become commercially viable extends beyond the maturation of the casket and can take up to twice as long. Given that the above casket time of XX years, this would be a total period of XX years. The business plan provided by you indicates that you expect to report a profit in the XXXX financial year, which aligns with this timeframe. It is accepted a commercially viable period of XX years applies to your business activity.

Based on the timeline of operations you provided, your business activity commenced in XXXX.