Lead time

Example 5

Tamsin acquired a still in September 2015, and the appropriate licences and authorisations to produce and distribute an alcoholic spirit. She commenced production of the base spirit in October 2015. Legislation states that the spirit must be aged in oak casks for at least two years before it can be bottled and sold.

Tamsin developed a business plan based on advice from her accountant and information from alcohol distributors. Tamsin's business plan indicates that she will be able to commence sales of her product in the 2017–18 income year. Tamsin will have losses from her activity that she wishes to deduct against her $50,000 salary and wage income for the 2015–16 and 2016–17 income years. Her activity will be profitable in the 2017–18 income year.

As Tamsin's alcoholic beverage production and distribution activity is carried on as a business in the 2015–16 and 2016–17 income years, she will need to ask for the Commissioner to exercise discretion for these income years. Tamsin is able to present independent evidence that making a profit in the third year of operation is within the period that is commercially viable for the industry.

The Commissioner accepts that it is in the nature of the business activity that there will be a lead time before a profit can be expected or one of the tests satisfied. The Commissioner would exercise discretion in such a case for each of the 2015–16 and 2016–17 income years inclusive. Any losses made in these years would not be deferred.

Example 6

In the 2015–16 income year, Jack has a taxable income of $200,000, reportable super contributions of $50,000, and reportable fringe benefits of $20,000. Jack also owns a vineyard that he purchased in August–2013. The vineyard is valued at $750,000 and has excess deductions of $50,000 in 2015–16.

Jack does not meet the income requirement because the sum of his taxable income, reportable fringe benefits, and reportable super contributions is $270,000. The vineyard has not made a profit in the previous income years. Despite the fact that his business activity is being carried on with real assets worth more than $500,000, he must now apply to the Commissioner if he wants to apply his losses against his other income.

Jack has obtained an independent assessment that the vineyard will make a tax profit (assessable income greater than deductions) within seven–years from when he started the business activity. The independent advice also includes evidence that the commercially viable period for the industry is at least seven–years. Jack applies to the Commissioner to exercise the discretion. The Commissioner decides that there is an objective expectation, based on the independent assessment and evidence, that the vineyard will produce assessable income greater than available deductions in a given year within a period that is considered commercially viable for the industry concerned, and that Jack can apply the $50,000 against his other assessable income in the 2015–16 income year.

Example 7

Phillipa started a red fruit growing business in the 2012–13 income year. However, Phillipa planted a very small number of red fruit bushes despite the recommendation from the industry body, Red Fruit Growers United, that significantly more bushes should be planted for a commercial activity. Phillipa planned to retire in about 15 years and gradually increased the size of the orchard over the ten years before her retirement. Phillipa installed an irrigation system as recommended by the industry body, which cost $150,000.

In the 2015–16 income year, Phillipa has a taxable income of $220,000, and reportable super contributions of $35,000.

She does not meet the income requirement because the sum of her taxable income and reportable super contributions is $255,000.

Phillipa's business made losses in the 2013, 2014 and 2015 income years. The exception for the primary production business activities did not apply, as she had received more than $40,000 of non-farm income in each year. Even though Phillipa carried on the business activity with other assets valued at more than $100,000, Phillip must apply to the Commissioner if she wants to apply her losses in the 2010 and future income years against her other income.

Evidence from the industry body shows that any red fruit growing business would not be expected to make a tax profit before year five as there are inherent characteristics that prevent it from doing so until around the time of full yield.

Even though there are inherent characteristics in Phillipa's business activity that prevent her from making a tax profit in the 2016 year, there needs to be an objective expectation based on evidence from independent sources that within the commercially viable period Phillipa will make a tax profit, for the Commissioner's discretion to be exercised.

Phillipa developed a business plan for her business activity based on the material she had from the industry body. As Phillipa had planted such a small number of bushes it was not likely that the business activity would make a tax profit until she retired in fifteen years and increased the number of red fruit bushes to a commercial number.

The evidence from industry experts shows that a red fruit growing business, conducted in a commercially viable manner, should be able to make a tax profit by the fifth year.

As there is no objective expectation that Phillipa's business activity will make a tax profit within a period that is commercially viable for the industry concerned, the Commissioner's discretion would not be exercised and the losses from Phillipa's business activity would be deferred.

Example 8

Andrew started a clock-repair business in the 2014–15 income year. He was new to the region and had yet to establish his clientele. Andrew had intended to operate his business full time, but as his funding was very limited he chose to continue his part-time employment to support himself and only worked on his business activity in his spare time. Andrew's premises are in the back of a small arcade and he only opens for business on weekends, while the other shops in the arcade are open every day of the week. The arcade is not in an area that attracts business on weekends. Andrew cannot afford advertising and has so few clients that he is unable to cover his expenses; he has made losses each year.

Andrew has a taxable income of $90,000 in the 2015–16 income year. Therefore, he meets the income requirement.

Andrew's business has yet to satisfy one of the four tests. Other businesses of this type are able to satisfy a test in the first year of operation.

The inability of Andrew's business activity to satisfy any of the four tests or produce a tax profit is due to his personal business choices as to his hours of business, location and advertising – not because of any inherent characteristics that affect clock-repair businesses. Accordingly, the Commissioner would not exercise the discretion.