Edited version of private advice

Authorisation Number: 1052119845155

Date of advice: 1 June 2023

Ruling

Subject: Non-commercial losses - lead time

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 primary production business in your calculation of taxable income?

Answer

No.

This ruling applies for the following periods:

1 July 2021 to 30 June 2026

The scheme commenced on:

14 October 2017

Relevant facts and circumstances

You operate a primary production business.

You have a herd of premium livestock.

You utilise a specified method for the purpose of breeding.

You have an agreement with a service provider where they care for and handle all animal husbandry for the cattle in exchange for a share of the gross sales.

You and your partner each own a share of a property.

You rented out the property to a primary production business in the business of breeding livestock for commercial purposes.

You took over the operation from the previous owner.

You decided to go from a commercial focus to breeding elite livestock, this will remain a natural breeding operation.

You have purchased additional livestock for the purpose of breeding and will also use livestock from the existing operation.

You developed the new operation with substantial capital investment.

You have refurbished the cottage, improved roads and replaced assets.

You have repaired and added fencing on the property.

You have subdivided the pastures and improved the grass quality throughout the property.

You stated an expansion of the business in both the number of livestock and increased quality has delayed achieving a profit.

You operate both these business activities under the same business ABN.

You applied for a private ruling for primary production of livestock due to lead time regarding the smaller herd from 2018 to 2021 financial year which was approved.

You listed on your 2020 and 2021 income tax return that you conducted a single business activity.

You utilised the non-commercial loss ruling previously issued to claim the expenses for the new operation in the 2020 and 2021 income tax year, these were listed as other expenses.

You provided projections for the business activities at the property from 2020 till the 2026 financial year showing a profit in 2025. These projections match 2020 and 2021 income tax years which contain the aggregated result of both the livestock business activities.

You did not satisfy the less than $250,000 income requirement as set out in subsection 35-10(2E) of the ITAA 1997 in the 2021 financial year.

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)

Reasons for decision

The general rule in subsection 35-10(2) of Division 35 of the ITAA 1997 prevents losses from a non-commercialbusiness activity carried out by an individual taxpayer from being offset against other assessable income in the year in which the loss is incurred, unless:

•         the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a)); or

•         an exception in subsection 35-10(4) applies; or

• the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to offset your loss against your other income for the 2021 to 2026 financial years.

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where:

• the business activity has started to be carried on but because of its nature it has not produced, or will not produce, assessable income greater than the deduction attributable to it; and
• there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests or produce assessable income for an income year greater than the deductions attributable to it for that year.

The note to paragraph 35-55(1)(c) of the ITAA 1997 states that the particular paragraph is intended to cover a business activity that has a leadtime between the commencement of the activity and the production of any assessable income.

You carry on a livestock breeding operation. It is accepted there are inherent features of the relevant industry that there is a leadtime before any assessable income is produced.

However, in order to exercise the discretion, the Commissioner must be satisfied that there is an objective expectation, based on evidence from independent sources, that the relevant business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period for the industry concerned.

In any case, it should be noted that the commercially viable period for an activity is measured from the commencement of the business activity itself: Case 13/2011 2011 ATC 1-040 at [27]. A change to an aspect of that business activity which does not constitute a new discrete and distinct business activity, (see Taxation Ruling TR 2001/14), will not generally reset this commencement date.

Business expansion

A livestock breeding business is about continuously improving and refining a breeder herd though management and genetic improvement plans using genetic and reproductive knowledge, and technologies to achieve desired production targets. The growth and expansion to your livestock operation in the 2020 financial year would reflect a natural evolution of a livestock breeding business activity and did not make your cattle breeding activity distinctly different enough to be a completely new and separate business activity for the purposes of Division 35 of the ITAA 1997.

In your case, the commencement of your livestock breeding activities was when you started the operation in 2017. Your acquisition of the second property and the improvements implemented to our business operation in the 2020 financial year did not constitute a new discrete and distinct business activity from the activity commenced before that.

Different business activity

In your submissions, you have stated that you commenced a different or new livestock business in the 2022 income year because of differences in the business activity, namely:

•         The two livestock operations are located in different locations

•         The agreement between you and the entity in which they manage the livestock in exchange for a share of gross sales whilst the new operation is self-owned and under your stewardship

•         The first operation is based on a specified method while the new operation is a different breeding method

•         The expansion of the business is not an expansion of the first operation but, the development of the new operation following a substantial amount of capital development

Taxation Ruling 2001/14 Income tax: Division 35 - non-commercial business losses outline in paragraph 45 factors to assist in determining if business activities are separate, these factors are not meant to be a checklist and that each factor should be given equal weighting.

Location

It is established that each activity is carried on at different locations.

Asset Used

It is established that different assets are being used in the carrying on of the activities with no crossover.

Goods/services produced (including mark conditions)

Primary production of livestock can generally be divided into four separate activities. These business activities are all governed by domestic and world market conditions for livestock produce, required to meet market specific standards and work under the same government and regulatory standards and guidelines. Though these activities are different types of goods/services they all possess significant similarities in the manager in which they are produced or marketed. Furthermore, it is not uncommon for farmers to perform several of these activities at once and for it to be considered a single business activity. Though you have outlined differences in the breeding process, these are not significant enough to warrant a claim they are in different markets as they both produce premium livestock for the purpose of seedstock.

Inter-dependency

There is varying interdependency between the activities. Both business activities operate under the same Australian Business Number and no steps have been taken to separate them in earlier income tax returns. You claimed the expenses for the new operation in the 2021 income year where you stated that you operated a single business activity, you have the option to list multiple business activities in your income tax return but, did not elect to do this. Furthermore, you have aggregated the financial projections your provided for the 2020 and 2021 income tax year as they match the combined total on the income tax return. It appears the same funds are used to run both properties.

Commercial links

There is little to suggest commercial links between the property. It is a point of consideration as to if the viability of the new operation was dependent on the non-commercial losses ruling for first operation.

Business activities of a similar kind

A non-commercial loss can only be applied when a new business has commenced. You took over the operations of a commercial livestock business activity that had already been operating. There must be sufficient difference between this business operation and the one you started to have commenced. TR 2001/14 paragraph 51 outlines factors to assist in determining if the business activities you are operating of stud breeding at the property are of a similar kind to the pervious business of commercial livestock.

Location

It is established that both business activities operated at the same location.

Type of goods or services provided

Both business activities are primary production livestock. The main difference between the two is the new activity will have a focus on breeding premium livestock and providing seedstock.

The market condition in which those goods are traded

These business activities are governed by domestic and world market conditions for livestock produce, required to meet market specific standards and work under the same government and regulatory standards and guidelines.

Type of assets employed

The new business activity has invested in repairing or rebushing pervious assets used such as the cottage and fences in place. They are also using the same livestock from the original operation with the intention to keep some for breeding.

Conclusion

The expansion of business activity is considered to be a natural progression of a primary production business. This is not an issue of lead time.

If we were to accept that this was an issue of lead time, which we do not, we consider both business activities to be a single business. You have treated both business activities as a single business in past income tax returns. Though there are differences in the business operations they are not sufficient to warrant the view that they are entirely different business activities. Furthermore, you have already claimed a lead time for the financial years 2017 till 2021 and you are unable to request additional time till the financial year 2026 as this is well beyond the commercially viable period for your industry which is between 3 and 5 years.

If we were to accept that you were operate two distinctly different businesses, which we do not, your current business activities at the property are similar to the previous business operated on the farm that we would consider the livestock breeding operation to be a continuation. As a result, lead time would not be applicable as the business had already commenced.

Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include your share of any losses from your primary production business in calculating your taxable income for the 2020 to 2026 financial years.