Edited version of private advice

Authorisation Number: 1052314071208

Date of advice: 24 October 2024

Ruling

Subject: Non commercial losses - lead time

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include your share of any losses from your partnership's business activity of growing Plant A in your calculation of taxable income for the relevant financial years?

Answer

Yes.

Having regard to your full circumstances, it is accepted that it is the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that the partnership will pass one of the four tests or make a tax profit within the commercially viable period for your industry. Consequently, the Commissioner will exercise his discretion for the relevant financial years.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse purchased Plant A seedlings in pots and registered your partnership business on a specified date under the name of XXX which grows Plant A on a property, with a specified number of two-year-old Plant A trees currently occupying part of the property.

The partnership does not have any employees and intends to sell cut Plant A trees once in every annual event, with the first harvest scheduled in the next year. After each harvest, you plan to replant the section and expand as needed. Additionally, you aim to sell items that accompany the Plant A trees.

You expect the partnership's business activity to meet the assessable income test in the next four years. You stated that the partnership is growing Plant A trees to be cut at a specific range of heights. The specific variety planted, takes 4 to 5 years to reach this height. You have experimented with planting seedlings in pots for the first year, which expedites the process and, depending on the weather, can save up to 12 months.

For the first crop of Plant A trees, the partnership purchased seedlings and planted them into pots. After one year, these trees were transplanted into a paddock. These trees were three years old, including two years in your care, and ranged in different height level. Over the next 12 months, you expect the trees to thicken up and reach a desirable size and shape for Plant A trees' sale.

You provided two webpage sources in similar circumstances to yours. These examples indicate that under the right conditions, Plant A tree will have appropriate growth per year.

You also provided projections for the next four years indicating that revenue and profit from selling the trees will begin in two years and peak in four years. You outlined three different scenarios based on the height levels of the trees. Your first harvest is expected to yield specific approximate number of Plant A trees. While you do not anticipate selling all the trees in the first year, you are aware that Plant A trees have sold out and become very difficult to find in your area over the past two years.

You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You have provided independent evidence that attests to a lead time of 5 years for the relevant industry. You expect the partnership to make a profit in two years and to produce at least $20,000 assessable income in four years.

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)(b)