Edited version of private advice

Authorisation Number: 1052015557065

Date of advice: 15 August 2022

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 (ITAA 1997) to allow you to include losses from your primary production business in your calculation of taxable income for the 20XX financial year?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 2021

Relevant facts and circumstances

You commenced a primary production business as a sole trader during the 20XX-XX income year.

The business consists of two primary production activities (Activity 1 and Activity 2).

You carry out the business on acreage you purchased jointly with another individual taxpayer.

The purchase price of the property was more than $XXX. You provided details of how the purchase of the property was funded.

You answered that four years is the accepted number of years before an activity becomes commercially viable in your industry.

You forecast first revenue from Activity 1 will be in the 20XX financial year.

You expect first revenue from Activity 2 in the 20XX financial year.

Overall, you expect your primary production business to make a profit in year four.

You have the provided the business plan for your business which includes your projected financials for each primary production activity, and combined financials.

Included in the business plan is independent research about the nature of both primary production activities.

In regard to the combined financials in your business plan, you advise that the Activity 1 part of your business operation has been modelled on other farmer's experience with cost and revenues based on today's conditions and the Activity 2 part of your business operation is modelled on known pricing for the produce. XXXX Price List, is included as an appendix in the business plan.

A commissioned environmental survey of your property is referred to in the business plan and states that this report raised the opportunity to run a sustainable XXXX farming business on the property.

In relation to Activity 2, you have spoken with a number of businesses in the area who have expressed their interest in your produce. They quoted potential prices which have been used to generate the business plan. You have sourced and purchased young stock from specialist suppliers.

In relation to Activity 1, you have engaged directly with others conducting successful comparable businesses and the XXXX Association to gain first-hand knowledge and obtain insights, guidance and support. Advice you have received from them aligns with a commercially viable period of four years for your industry.

You have visited a number of rural shows which you state enabled you to strengthen relationships formed with others carrying on the same activity. You also met people from across the industry including suppliers, insurers and financiers.

Both primary production activities will utilise many of the same fixed assets.

There are a number of costs that are identifiable as specific to each business activity however many are shared costs such as running costs for the machinery to manage the land. You have provided the estimated operating costs for four financial years. The shared operating costs are more than 50% of the operating costs for each of those years.

Your income for non-commercial loss purposes is more than $250,000 for the year this ruling applies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(i) to (iv)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Division 35 applies to defer losses from non-commercial business activities unless:

•         you meet the income requirement in subsection 35-10(2E) and you pass one of the four tests referred to in subparagraphs 35-10(1)(a)(i) to (iv);

•         the exception in subsection 35-10(4) applies; or

•         the Commissioner exercises his discretion under section 35-55 to not defer the losses (see subsection 35-10(1) and (2)).

You do not meet the income requirement as your income for the purposes of subsection 35-10(2E) is not less than $250,000. The exception in subsection 35-10(4) does not apply to you as while your activity is a primary production business, your non-farm income for the 20XX financial year is not less than $40,000.

Your business losses are therefore subject to the deferral rule under subsection 35-10(2) unless the Commissioner exercises his discretion.

Where you do not satisfy the income requirement in subsection 35-10(2E), paragraph 35-55(1)(c) provides that the discretion may be exercised for the income years in question where the Commissioner is satisfied that:

•         it is because of its nature that your business activity will not produce assessable income greater than the deductions attributable to it; and

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

Having regard to your circumstances and the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion, it is accepted that it is the nature of your business activities that will prevent you from making a tax profit in the 20XX income year.

It is also accepted that you are expected to produce an overall tax profit within the commercially viable period for your industry.

Consequently, the Commissioner will exercise his discretion under paragraph 35-55(1)(c) for the 20XX income year if you incur a tax loss for that year from carrying on your primary production business. This means you will be able to offset that loss against your other assessable income.