Edited version of private advice

Authorisation Number: 1052073688265

Date of advice: 23 December 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 to 20XX-XX financial years?

Answer

Yes.

Having regard to your full circumstances, it is accepted that it is the nature of the business activity that has prevented you from meeting one of the four tests or making a tax profit. It is also accepted that you will pass the assessable income test or make a tax profit within the commercially viable period for your industry. Consequently, the Commissioner will exercise his discretion in the years ending 30 June 20XX to 30 June 20XX.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

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

You carry on a primary production pistachio and sandalwood business.

The property is XX hectares in total, with pistachios occupying X hectares and the sandalwood/revegetation X hectares. There is additional croppable area of XX hectares that you have allowed a neighbouring farmer to use. The remainder consists of native vegetation, dams and catchments, creeks and buildings.

You operate the businesses as a partnership.

You commenced business operations on 1 July 20XX.

You renovated the dams and commenced tree planting in 20XX.

Due to the limited annual supply of XXXX trees in the area (~ 300 most years, but 100 in 20XX), it took until 20XX to plant 1,100 trees.

With the sandalwood plantation, the seed was supplied in 20XX and you commenced with sowing host seed in 20XX and sandalwood sowing started in 20XX.

The host trees for the sandalwood are mainly acacias with some other native species as a minor component of the seed mix.

In the early years, the farm work was carried out by the partners, with occasional assistance from backpackers and relatives/friends.

You now employ a farm worker on a casual basis.

Both XXXX and sandalwood have a long lead time before an income is generated. The Commissioner's discretion is sought for the farming business which is based on both activities.

XXXX may commence bearing fruit from approximately 5 years of age, but do not reach full productivity until 10 years old.

Your oldest trees began producing XXX a couple of years ago, but these were taken by birds, so in the 20XX-XX income year, you installed a laser bird scarer, in addition to bird-scaring cannons.

You harvested some XXXX in 20XX, though not a marketable quantity.

At the time you commenced planting the XXXX trees, a XXXX processor was operating in the area, but the operators have since retired. You will need to purchase your own hulling and shelling machinery and market the nuts yourselves. This will require additional investment over the next year or two.

Australian sandalwood is not harvested until at least 20 years of age and often much older in drier regions.

XXXXX Australia states that the valuable oil and timber are contained within the heartwood, which only starts to form at approximately year 5. While timber can be harvested from year 7, a higher value output will be available from 12-20 years, which is when most commercial harvest occurs. You provided the following resource: https://agrifutures.com.au/farm-diversity/sandalwood-wood/

Your forecast shows that you will meet the assessable income test in the year ending 30 June 20XX. You advised income projections are quite low and it is possible that you may turn a profit by the year ending 30 June 20XX, depending on nut yield.

You intend to make a tax profit in the year ending 30 June 20XX.

The major income from the sandalwood will come when the trees themselves are harvested, but that won't be until at least 20XX.

Your projected expenses relate to all farm activities - XXXX and sandalwood/revegetation. You have not recorded expenses for the XXXX and sandalwood separately, though a majority of the expenses would be XXXX related.

Expenses relating to sandalwood have been very low as the host and sandalwood seeds and machinery for sowing the hosts were supplied as part of a government-funded natural resource management project. You paid a small amount of labour for land preparation and sowing of seed, and this was included in the cash flow spreadsheet.

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)