Non Commercial Losses: lead time discretion - plant disease affecting the 'commercially viable period'

Will the Commissioner take into consideration the effect of a plant disease which extends the established 'period that is commercially viable for the industry concerned' when considering whether to exercise the second arm of the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The Commissioner will take into consideration the effect of a plant disease which extends the established 'period that is commercially viable for the industry concerned' when considering whether to exercise the second arm of the discretion in paragraph 35-55(1)(b) of the ITAA 1997.

A taxpayer, who is an individual, commenced a plant growing business activity with healthy plants in the 2000-01 income year.

When requesting that the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997, the taxpayer provided independent information which showed that a commercial plantation of this type is expected to be commercially viable and profitable within ten years of commencement. This time period had been established on the basis that the business activity commenced in the year of planting the seedlings and favourable growing conditions prevailed for the ten years.

During the year, the taxpayer's plants were infected with a disease which inhibited their development. This disease has been widespread within the industry for a number of years.

Independent industry information provided showed that plants that have been infected by this particular disease are retarded in their development by two years.

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner may exercise a discretion to allow the loss to be offset against other income where it would be unreasonable to apply the loss deferral rule in subsection 35-10(2) of the ITAA 1997. 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 satisfied 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.

When determining the 'period that is commercially viable for the industry concerned' as it relates to a particular business activity's industry, the Commissioner takes into consideration industry information where available.

In this case, the Commissioner was satisfied that the independent evidence demonstrated that the 'period that is commercially viable for the industry concerned' as it applies to this business activity is twelve years from commencement. This is on the basis that independent industry evidence states that, in general, the 'period that is commercially viable for the industry concerned' would be ten years from commencement of the activity, but due to the effects of the disease on the plants, the period is extended by two years to twelve years. Therefore, taking all the industry information into account, the 'period that is commercially viable for the industry concerned' as it relates to this particular business activity, is twelve years from commencement.