Edited version of private advice

Authorisation Number: 1052151160439

Date of advice: 11 August 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 activity in the calculation of your taxable income for the 20XX to the 20XX income years?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You commenced a primary production business in 20XX.

Property settlement occurred in 20XX.

The purpose of the farm is XX% for livestock production.

There is zero land tax as the property is for primary production exclusively.

The property had not been maintained for many years and was in a poor state of repair.

No machinery was included with the purchase of the property.

Professional advice regarding pasture management and feeding schedule/budget was obtained. A 20XX Pasture management plan with timing of activities in the 20XX calendar year to optimise pasture productivity on X acres for the enterprise was provided.

It is expected that it will be X years before the activity becomes commercially viable.

The business commenced during Covid-19 Lockdowns. As a result of movement restrictions from the lockdowns, a decision was made to begin with a smaller group and have controlled growth with the group to be increased in 20XX and 20XX. Initial costs were incurred to remove rubbish, replace fencing and other improvements.

There is a house on the property it is not rented and will be demolished.

You received salary and wages over $250,000 in the financial years 20XX, 20XX and 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 34-10(2)

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 Division 35-10(4)

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

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 sheep farming business in the calculation of your taxable income for the financial years ended 30 June 20XX to 30 June 20XX.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997.

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 20XX, 20XX and 20XX 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 20XX, 20XX and 20XX 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 20XX, 20XX and 20XX income years if you incur a tax loss for that year from carrying on your primary production business. This means you will be able to offset that loss against your other assessable income.