Edited version of private advice

Authorisation Number: 1052034079091

Date of advice: 16 September 2022

Ruling

Subject: Non-commercial loss

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include losses from your primary production business in your calculation of taxable income for the 20XX and 20XY financial years?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XY

Relevant facts and circumstances

You are conducting a farming enterprise.

The initial farmland was XXX acres which was used for both cropping and livestock production.

You initially had XX head of livestock and intend to increase livestock numbers through purchases and natural increase to expand your business.

Originally you had forecast to make a taxable profit in the XX income year. This was considered to be a commercially viable period for your primary production industry. However, a taxable profit has not eventuated as first forecast. This has been due to severe drought in the area where your farm is located.

During the drought. there were crop failures and a sharp decline in feed for livestock. However, you maintained breeding activities and produced some grain sales. Your income from both cropping and livestock sales were substantially less than expected.

You forecast once the drought broke, recovery would take XX months. Drought had a large impact on the farming operations, and it is taking longer than initially projected to be profitable.

In the XX year, livestock sales were less than the XX year as livestock were retained to help increase heard numbers and to allow stock to mature more and get better prices when sold. Consequently, heard numbers are now at XXX head with a target of XXX head. The XX year sales are expected to be higher than XX year and to remain consistent from year to year as the heard will have reached target size.

The farm has been expanded to XXX acres after purchasing additional properties. Improvements and repair work has been completed as the farm was in a rundown condition. Drought proofing the farm and other improvements are continuing.

Major works will continue in XX year resulting in a loss of $XXX. This would be the first profit year if not for the immediate write-offs available. It is expected that the enterprise will be in a profit position in the XX financial year as all major works will be completed.

You come from a background of farming with your family being heavily involved in the industry for decades. You have the knowledge and skills necessary to grow and expand the business successfully and become profitable.

Your income for non-commercial loss purposes for the financial years XX has been more than $250,000 and is expected to be greater than $250,000 in the XX financial year.

You have previously applied for the Commissioner to exercise his discretion for non-commercial business losses. The initial application was for the XX financial years based on the nature of the activity and the subsequent ruling was for the XX years because of special circumstances. Both were approved.

Documents provided:

•         Income and expenses projections for XX financial years

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)

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(ii)

Income Tax Assessment Act 1997 subparagraph 35-10(1)(a)(iii)

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

The Commissioner will 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 primary production business in the calculation of your taxable income for the XX income years.

Detailed reasoning

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 XX financial years 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 XX income years.

It is also accepted that you are expected to produce an overall tax profit within the commercially viable period for your industry taking into account the effect the drought had on the length of this period.

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