Edited version of private advice

Authorisation Number: 1052082385620

Date of advice: 31 January 2023

Ruling

Subject: Non-commercial business losses

Question

Will the Commissioner exercise the discretion to allow you to include any losses from your primary production business in the calculation of your taxable income for the 20XX income years?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents provided by you:

• Application for a private ruling on the Commissioner's discretion for non-commercial business losses
• Business Plan
• Profit and Loss Statement Years ended 30 June 20XX to 20XX (Actual) and 20XX to 20XX (Projected)
• Letter from Industry expert - opinion on Business Plan
• Certificates of Completion of Courses

Farm Business Plan

You conduct your primary production business at your property.

The Property consists of XX hectares (approximately XX acres) the bulk of which is suitable for your primary production business.

In June 20XX, initial business investments were made.

In the Year ended 30 June 20XX, there was continued investment as required to properly manage the primary production business

A part-time business manager is employed as well as casual staff and contractors to undertake the repair/renovation of existing infrastructure.

In 20XX, work commenced on new infrastructures in relation to the primary production business. These are likely to be completed in late 20XX.

Due to the fluctuating stock prices during the 20XX income year, you adopted a specific business strategy. Since then, the prices have risen considerably until some fall back in 20XX. The cost of new stock has made it difficult to viably justify external purchases and adoption of other business strategies. As a consequence, the optimum strategy has remained to your current business strategy.

You provided Profit and Loss Statement that shows actual loss amounts for the income years ended 30 June 20XX to 30 June 20XX

Profit and Loss Statement also provides projected figures showing loss in the income years ending 30 June 20XX and 20XX. The projected figures expect the primary production business to start making profit in the income year ending 30 June 20XX.

Industry expert letter provided confirms the updated version of the business plan remains commercially viable and, in particular, the lead time set out in the business plan to achieve profitability remains within the normal parameters for a commercially viable primary production business of the kind.

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

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 relevant 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 relevant income years.

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 relevant 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.