Edited version of private advice

Authorisation Number: 1052340114087

Date of advice: 9 December 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 any losses from your business activity 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 you 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 in the relevant financial years.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse are running a partnership business focused on growing Plant A trees. You have a property with a specified number of young trees currently occupying a smaller part of the property. Each year, you plan to plant additional trees.

The partnership does not have any employees and intend to sell cut trees in every annual big event, with your first harvest scheduled for next year annual event. After each harvest, you plan to replant the section and expand as needed. Additionally, you aim to sell items that accompany the trees, such as stands and decorations.

You expect to meet the assessable income test in a specified year, and in your industry, it is accepted that it takes about five years for an activity to become commercially viable. You mentioned that you are growing Plant A trees to be cut at a specific range of heights. The specific variety you 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 your first crop of Plant A trees, you purchased seedlings and planted them into smaller 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.

You provided two webpage sources in similar circumstances to yours. These examples indicate that under the right conditions, such as full sun and well-drained acidic soil, they will grow about one to three feet per year.

You also provided financial projections for five years indicating that revenue and profit from selling the trees will begin in two years' time and peak in fifth years. You outlined three different scenarios based on the height levels of the trees. Your first harvest is expected to yield a specific 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 commenced business operations in a specified financial year. You have provided independent evidence that attests to a lead time of 5 years for your industry. You expect your business activity to produce at least $20,000 assessable income in the relevant 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)(b)