Edited version of private advice

Authorisation Number: 1052027124407

Date of advice: 31 August 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

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 any losses from your business activity in your calculation of taxable income for the 20XX-XX financial year?

Answer

Yes.

Having regard to your full circumstances, it is accepted that it is the nature of the business activity that has prevented you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry. Consequently, the Commissioner will exercise his discretion for the year ending 30 June 20XX.

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 not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a primary production cattle business.

You operate the business in a partnership and engage contractors as required.

Contractors won't be required much moving forward and possibly only used for branding.

You commenced business operations in the year ended 30 June 20XX.

You intend to breed up a herd of stud Angus breeders focusing on selecting quality genetics to grow your herd to XX breeders.

The intention is to breed Angus cattle and sell offspring to market. You will only sell in Australia.

The plan is to have an Angus beef stud in full swing by 20XX.

The business will take an extended time to turn a profit due to the breeding cycles and the minimum availability of stud cattle at this point. The plan is to breed up a herd over the coming years to have a Stud herd of breeders of XX-XX head.

You advised that whilst this is not a large herd, you are trying to keep the quality very high.

Due to the price fluctuation and the increased difficulty of being able to sell the stud offspring as readily as trading cattle for the price wanted, you are also looking to purchase and trade XX steers every six months to assist with cashflow.

Angus is one of the most popular beef cattle breeds because of its ability to grow healthy bodies through grazing. This breed has a very low rate of problems relating to reproduction.

For the year ended 30 June 20XX you met the Real Property Test and the Other Assets Test.

The additional costs incurred were of a capital nature, such as updating equipment for the farm in case the drought were to remain.

Both partners in the farming partnership ceased employment with off farm employers.

You provided independent evidence in the form of the Commercial Cattle Breeding Manual Version 2, that is available on the Meat and Livestock Australia website (https://www.mla.com.au/globalassets/mla-corporate/research-and-development/program-areas/live-export/commercial-cattle-breeding-manual.pdf), which states that the accepted number of years before an activity becomes commercially is 1-3 years.

You intend to make a profit in the year ending 30 June 20XX. Your forecasted income and expense figures based on budgets prepared, suggest that the business will likely earn a profit in the year ending 30 June 20XX.

The inherent features of your business activity means there is a period of time from when it commenced to when it makes a profit, specifically that breeding quality Angus genetics takes time due to the process of selecting and joining quality bulls and cows. The logical breeding cycles and mortality rates impact your ability to turn a profit in the immediate term. The length of time to begin turning a profit has also been affected by the current cattle market and inability to purchase mature cows of high-quality genetics. The current higher rainfalls and better grazing conditions have resulted in existing farmers retaining breeders.

The business began midway through the year ended 30 June 20XX and did not make a profit for the year ended 30 June 20XX. But for the following circumstances, the business activity would have made a tax profit:

(a)  lead time in breeding stud beef cattle industry is at more commonly 3 years - attached business forecast supports an expected profit in the year ending 30 June 20XX;

(b)  the current cattle market with recent higher rainfalls and better grazing conditions has resulted in existing farmers retaining breeders and reduced ability to purchase a herd of quality genetics - this supports the business plan to breed up a breeder herd selecting quality genetics for the enterprise;

(c)   due to current stud cattle market, going forward the business intends to purchase and trade in XX steers every six months to assist with cash flow as you grow your stud breeding herd, with this changing if the market changes and allows you to purchase mature cows suitable for your breeding program; and

(d)  the temporary full expensing of assets and other accelerated depreciation methods resulted in increased tax losses for the current year.

You currently have XX Angus breeders with XX heifers & XX steers at foot. The plan is to retain heifers and sell steers. The heifers will join the breeding cycle at two years.

Due to the current stud cattle market the business has evolved, and you intend to purchase and trade in XX steers every six months to assist with cashflow until you are able to either purchase suitable mature cows or your breeding herd grows.

In the year ended 30 June 20XX you incurred substantial expenses and made a loss.

You are currently monitoring the market and plan to purchase steers during the year ending 30 June 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)