Edited version of private advice

Authorisation Number: 1052231894707

Date of advice: 15 March 2024

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 losses from your primary production business activity in the calculation of your taxable income for the 20XX and 20XX income years?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You commenced a primary production business (Business) as a sole trader in 20XX.

You have many years of experience in the primary production industry, specifically in respect of farming the particular product.

You have non-primary production business interests however you dedicate the majority of your time to the Business; approximately XX hours per week on average.

The Business is conducted on land owned by you.

This property was acquired in 20XX. You paid $XXX for the property.

In 20XX you acquired additional primary production land for a purchase price of $XXX, funded by a bank loan.

You now own XXX acres of fully employed primary production land.

You acquired significant agricultural plant, equipment and improvements costing $XXX.

During 20XX, you acquired further stock for $XXX with the intent of increasing production now that additional primary production land is available.

You have provided documentary evidence from an independent source who objectively expects that the Business will produce net income within a commercially viable period commensurate with your industry.

You expect a tax profit in the year ending 30 June 20XX.

You have provided details of steps you have taken to achieve premium prices for your product.

In the 20XX and 20XX income years:

•         the amount of assessable income from the Business was greater than $20,000

•         the market value of real property used in carrying on the Business was greater than $500,000; and

•         the value of assets used in carrying on the Business was greater than $100,000.

You have not met the income requirement in subsection 35-10(2E) of the Income Tax Assessment Act 1997.

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) to (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 Income Tax Assessment Act 1997.

Division 35 applies to defer a non-commercial business loss from a business activity you carried on in that year if you are an individual, unless:

•         you meet the income requirement in subsection 35-10(2E) and pass one of the four tests 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)).

Your business activities satisfy the assessable income test, real property test and other assets test listed in section 35-10.

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 as, while your activity is a primary production business, your assessable income from other sources 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 primary production business activities that prevented you from making a tax profit in the 2022 and 2023 income years.

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) for the losses you made in the 2022 and 2023 income years.