Edited version of private advice

Authorisation Number: 1052248308009

Date of advice: 22 May 2024

Ruling

Subject: Commissioner's discretion - non-commercial loss

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your primary production activity in the calculation of your taxable income for the relevant years.

Answer

Yes, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 as the yield from your primary production activity was adversely affected by drought and bushfire. These events were special circumstances beyond your control as described in paragraph 35-55(1)(a) of the ITAA 1997, and it is accepted that you will make a profit from this activity within the commercially viable period for your primary production activity as extended by this exercise of the discretion.

This ruling applies for the following periods:

Year ended 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

Your income for non-commercial loss purposes for the relevant years is more than $250,000.

You purchased land for primary production as an income earning activity.

The land is situated on a mountain and bordered on one side by a National Park.

There is a fire break between your land and the National Park.

The property on which you are farming is on gently sloping land that allows for drainage and access for agricultural machinery. Initial assessment indicated that the land was suitable for the produce you intended to farm but improvement to the irrigation infrastructure might also be needed to support your farming activity, maximise your yields, and mitigate the risk of inadequate rainfall.

The climate on your property is mild and the average annual rainfall there is over 1,200 mm. This rainfall is summer dominant but spread throughout the year. The temperature and rainfall experienced on your property are suitable for your primary produce farming.

Initial expert advice on the suitability of the soil on your land for your primary produce farming indicated that it would be suitable but would need some conditioning.

You added the recommended products, and planned to install irrigation to support your primary produce farming once your focus moved from establishing the enterprise to maximising production.

Risks identified in your business plan included both fire and drought, among a number of others.

The likelihood of fire affecting your primary produce farming was rated as medium in this plan, and the potential level of impact on your production also rated as medium. The measures identified to manage the risk of fire included;

•         maintenance of fire breaks throughout and along the external boundary of the property,

•         tree pruning to reduce potential fire load and prevent the spread fire.

•         access to dam water for fire trucks in the event of fire.

•         maintenance of a fire pump and hoses.

The likelihood of drought affecting your primary produce farming activity was rated as low in your business plan, and the impact on your production rated as medium. In assessing the likelihood of drought as low you took into account a database of over 100 years of Australian climate data.

Your assessment of the impact of drought was based on the literature available at the time on your primary produce farming activity. You believed that your produce bearing stock would survive low rainfall, and it would only impact your yield in the following year.

As you believed there was a low likelihood of drought you chose to manage the risk by monitoring soil moisture and using a temporary irrigation solution while establishing the activity. You believed that in the event of drought survival of your young produce bearing stock trees took priority over the small yields you would be producing in the early years of your venture. You have, in more recent years, installed permanent irrigation across the orchard.

You eventually planned to expand your primary produce farming activity across a significant part of your land.

You obtained development approval for your enterprise from your local council.

Within 2 years of commencing your activity you had established a commercial quantity of produce bearing stock on your land and prepared further acreage for more stock.

You initially estimated you would be producing commercial quantities of your primary produce for sale within 7 years and would be making a profit in 9 years.

You applied for, and were granted, the Commissioner's discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 to include losses from your activity in your taxable income for the years it would take you to achieve commercial viability in your primary produce farming activity. This discretion was granted because the delay in making a profit on your primary produce is in the nature of the activity, and there was an objective expectation you would make a profit within a commercially viable period for this industry.

Within 10 years you had established well over half your planned primary producing stock but your enterprise was adversely affected by both drought and bushfire.

Much of your state was affected by a drought that was declared a disaster by the state government through the latter part of this period. Your land received record low amounts of rainfall after several dry months, and this exacerbated the soil dehydration.

Historical data showed that over the 119 years of recorded weather data for this region the average rainfall for the driest month you experienced is more than 20 times this amount.

You were able to keep the primary produce bearing stock you had planted alive through this dry season with the fire pump and a line of sprinklers.

As a fire of unprecedented magnitude approached your property through the driest part of this period you spent a considerable amount of time and effort preparing your property against the probable impact of the fire and were not able to devote more time to the care of your primary produce bearing stock.

The bushfire burnt to the boundary of your property with the National Park, further compounding the generally dry conditions. The fire front also came to within 10 m of your primary produce stock and caused high levels of distress to the stock.

The dry conditions and distress caused by the bushfire caused an estimated loss of 96% of your expected production in 2020 and had adverse effects on production in the following years.

Taking your drought and fire induced setbacks into account you have revised your expected primary produce yields. You are now expecting to produce commercial quantities of your primary produce by 2025 and to be able to consistently make a profit on your activity from 2027.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 35-10(1)(a)

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