Edited version of private advice

Authorisation Number: 1052101201938

Date of advice: 29 March 2023

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

Answer

Yes.

This ruling applies for the following period:

Income years ending 30 June 20XX to 30 June 20XX

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You commenced a primary production business during the 20XX income year.

You are a sole trader.

You are establishing the business activity on a property you purchased.

The business activity will produce a product in commercial quantity.

The nature of the business activity means that a number of years will pass between commencing the business activity and producing the product.

You have produced evidence from independent sources supporting that in your industry, 5 to 7 years is the accepted number of years before an activity becomes commercially viable.

You have prepared a business plan for the business.

The projected financials in the business plan forecast that the business activity will first produce product in 20XX, which is year 6 of the business. The estimated sales and outgoings for 20XX result in a tax profit.

Production in subsequent years is expected to increase substantially, with only a relatively minor increase in outgoings, resulting in substantial profits from 20XX.

Estimated sales are based on what is currently being achieved by established comparable businesses in the local area.

You have an interest only business bank loan.

The projected financials in the business plan show that your loan interest payments per annum do not affect the expectation that the first year the business will produce a tax profit is the 20XX income year.

Your income for non-commercial loss purposes in the 20XX income year (the income year prior to the income year this application was received by the Commissioner) is $250,000 or more.

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 (subsection 35-10(1) and (2)).

You do not meet the income requirement as your income for the purposes of subsection 35-10(2E) for the most recent income year ending before your application was made is not less than $250,000. The exception in subsection 35-10(4) does not apply to you (as assumed for the purposes of this ruling).

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 income years 20XX to 20XX.

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 the discretion under paragraph 35-55(1)(c) for the income years you make a tax loss from carrying on your primary production business during the period 1 July 20XX to 30 June 20XX. This means you will be able to offset a loss from your primary production business in the particular income year against your other assessable income for that year.