Edited version of private advice

Authorisation Number: 1051954644466

Date of advice: 24 February 2022

Ruling

Subject: Commissioner's discretion - primary production

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You do satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You conduct activities related to primary production.

On the XXXX you purchased land at XXXX, and you started research, planning activities, soil preparation, infrastructure and development planning for mixed primary production activities. You named your business activity as XXXX.

You provided a copy of 'The XXXX Business Plan' updated in XXXX.

On XXXX, you further provided Income Forecast together with information regarding the activities undertaken and status of your production as at XXXX and to date. This information is summarised in the table below: XXXX

In your correspondence dated XXXX, you also stated:

•         The planting of XXXX commenced in XXXX and the current stock in the ground is XXXX.

•         Seed germination for XXXX commenced XXXX due no current seedling availability.

•         COVID restrictions had an impact on the supply chain and the ability to source local stock and materials.

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:

Detailed reasoning

Where you can demonstrate that your business activity is commercially viable but, because of its nature, there is a lead time between the commencement of the activity and the production of any assessable income, you may apply for the exercise of the Commissioner's discretion.

The Commissioner must be satisfied that both:

•         the activity, because of its nature, has not satisfied, or will not satisfy, any of the four tests; and

•         there is an objective expectation, based on independent evidence (where available) that, within a period that is commercially viable for the industry, the business activity will either:

­    satisfy one of the four tests

­    make a tax profit.

The meaning of 'because of its nature'

•         For the Commissioner to exercise the discretion under lead time, you must be able to show that the reason your business activity is producing a tax loss in a year is because of something inherent to the nature of the business and not something peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked, or business choices made by you that are not consistent with the ordinary or accepted practice in the industry concerned.

•         Taxation Ruling TR 2007/6 Income tax: non-commercial businesses losses: Commissioner's discretion, deals with the exercise of the Commissioner's discretion and the meaning of 'because of its nature'.

As stated in paragraph 17 of TR 2007/6, for the failure to satisfy one of the four tests (subparagraph 35-55(1)(b)(i)) or produce a tax profit (subparagraph 35-55(1)(c)(i)) to be 'because of its nature', 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

At paragraph 78 it states:

The consequences of business choices made by an individual (for example...the size or scale of the activity...) are not inherent characteristics of a business activity and would not result in the requirements of subparagraphs 35-55(1)(b)(i) and (c)(i) being met.

•         In Scott v. Commissioner of Taxation [2006] AATA 542, the Administrative Appeals Tribunal (AAT) upheld the Commissioner's decision not to exercise the discretion. The AAT member expressed the following view:

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.

Objective expectation about future performance

For the discretion to apply, the Commissioner must be satisfied that there is an objective that your business activity will pass one of the tests or make a profit within a period that is commercially viable for the industry concerned. The objective expectation must be based on independent information, where such information is available.

The lead time discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. The lead time for a combined activity will be determined by the shorter of the two lead times to produce any assessable income and applies from the commencement of the business activity.

You have provided information to indicate that the commercially viable period for XXXX is X years.

It is accepted that it is in the nature of your activity there will be a lead time before a profit can be expected or, one of the tests passed. However, there must also be an objective expectation this lead time is within a period which is commercially viable for this industry.

The information you have provided does not demonstrate that there is an objective expectation that your business activity will meet the assessable income test (which is the test relied on in the ruling application) within the commercially viable period,

Your decision to start at a small scale, as evidenced by the current stock level, is an individual circumstance affecting your activity rather than an inherent characteristic of the industry.

You have stated that the activity would meet the assessable income test in the 20XX income year. However, we are not satisfied that the activity would meet the assessable income test in 20XX financial year based on the following:

•         You have provided income forecasts to show that your activity will meet the assessable income test and produce a tax profit in the 20XX financial year. However, the forecast is based on the stock that is not currently available.

•         Your forecasts are based on the harvest/production of XXXX consisting of XXXX.

•         However, the information you provided indicates that a small scale of XXXX was planted in XXXX, the planting for XXXX only started in XXXX and the current stock for XXXX is XX.

Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 and you cannot claim a deduction for your losses against other income in the 20XX income year.

Conclusion

The Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the XXXX financial year because, based on the information provided, the Commissioner is not satisfied that your activity will meet the assessable income test (which is the test relied on in the ruling application) or produce a tax profit within the commercially viable period for the industry.

The rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any losses from your activity for the year ended 20XX. A deferred loss will be deductible against any tax profit from your activity, or similar business activity, in future years.

If your activity satisfies the income requirement and one of the tests in Division 35 of the ITAA 1997 in a future year, then the deferred loss can be deductible in that year.