Non Commercial Losses: Lead Time Discretion - commercially viable period - purchase of business activity

Is the time from when a business activity starts to be carried on to the end of the 'period that is commercially viable for the industry concerned', for the purposes of the second arm of the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), taken from the date the plant growing business activity was purchased by a new owner?

No. When the Commissioner is considering whether to exercise the second arm of the discretion, in paragraph 35-55(1)(b) of the ITAA 1997, for this plant growing business activity, the 'period that is commercially viable for the industry concerned' is taken from when the plant growing activity commenced, and not when the activity was purchased by a new owner.

A taxpayer, who is an individual, purchased a substantially developed plant growing business activity with healthy plants, in the income year ending 30 June 2001. The previous owner had planted the seedlings in the 1998 calendar year, three years prior to the purchase, and the plants did not bear any produce in the year ending 30 June 2001.

The taxpayer provided income and expense projections, supported by independent information, which showed that this activity will produce assessable income of at least $20,000, and a taxation profit, for the first time in the income year ended 30 June 2008, approximately seven years after the purchase of the activity by the taxpayer, and ten years after the seedlings were planted.

The taxpayer supplied independent information showing that a commercial plantation of this type, in this horticultural industry, which commenced at the time of planting seedlings, is expected to be commercially viable and profitable within six years from the commencement of the business activity.

Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss made by a taxpayer, who is an individual, from carrying on a business activity, unless: • their business activity satisfies one of the four tests in Division 35; or • the Commissioner has exercised the discretion in section 35-55 for the activity; or • the individual comes within the Exception to Division 35, contained in subsection 35-10(4).

(subsection 35-10(1) of the ITAA 1997)

The business activity in this case has commenced, and is carried on by a taxpayer who is an individual, as a business, in the income years ended 30 June 2001 and subsequent years. Therefore, losses made from the activity will be potentially subject to Division 35 of the ITAA 1997.

The activity will not meet any one of the four tests under Division 35 of the ITAA 1997 for several years, and neither will the exception to the Division in subsection 35-10(4) of the ITAA 1997 apply. Losses made from the activity in these years will therefore be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner decides under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable to apply that rule.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 can only be exercised where: (i) the business activity has started to be carried on; and (ii) because of its nature it has not yet met one of the tests set out in Division 35 of the ITAA 1997; and (iii) there is an objective expectation based on independent evidence that the activity will either meet one of the tests, or produce a taxation profit, within a period that is commercially viable for the industry concerned.

The discretion therefore, is intended in such a case to be exercised for the income years from when the business activity first commenced until it could be expected to meet one of the four tests or make a taxation profit. This period has to be within the commercially viable period for the industry concerned.

The taxpayer has provided independent evidence that demonstrates that the 'period that is commercially viable for the industry concerned' (subparagraph 35-55(1)(b)(ii) of the ITAA 1997) is six years from the commencement of an activity of this type.

Where an ongoing business activity is purchased by a new owner as a going concern, the 'period that is commercially viable for the industry concerned' per paragraph 35-55(1)(ii) of the ITAA 1997 is taken from commencement of the activity, not when the activity was purchased by the new owner.

In this case, the taxpayer has purchased an activity that commenced at the time the seedlings were planted, which was three years prior to the purchase. Therefore, when determining whether the activity will meet a test within a 'period that is commercially viable for the industry concerned', this fact must be taken into consideration. Taking into consideration that the activity had commenced three years prior to the purchase, the taxpayer must be able to show that the activity will meet a test or produce a taxation profit by the sixth year from when the seedlings were planted and within three years of taking ownership, to enable the Commissioner to exercise the discretion.

The information the taxpayer has provided (that the activity will produce assessable income of at least $20,000, and a taxation profit, seven years after purchase) does not allow the Commissioner to conclude that there is an objective expectation that the business activity will either meet one of the tests or produce a taxation profit within the period that is commercially viable for the industry.

Accordingly, it is considered that it would not be unreasonable for the loss deferral rule to apply. Therefore, the discretion under paragraph 35-55(1)(b) of the ITAA 1997 will not be exercised.