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The Administrative Appeals Tribunal has affirmed the Commissioner’s decision, expressed in a private ruling, not to exercise the discretion in s 35-55(1)(c) ITAA 1997 in favour of a taxpayer who had established a non-commercial business activity, and who wished to include losses from that activity in the calculation of the taxpayer’s assessable income in the year of income in question: Re Hefner and FCT [2013] AATA 407 (Senior Member McCabe, 18 June 2013).

The taxpayer had established a cattle breeding business in February 2009. The evidence was that it was intended to be a “greenfields” cattle stud (ie, one that is started from scratch, as opposed to one that taps into existing, readily available bloodlines) that has a long lead time before it becomes successful.

The taxpayer obtained a private ruling which noted that the taxpayer did not anticipate producing a tax profit until the 2017-2018 year of income when his debt levels were reduced.

Under Div 35 ITAA 1997, losses from non-commercial activities are effectively quarantined from a taxpayer’s other income, unless the Commissioner exercises the discretion in s 35-55 to allow losses to be claimed in a particular income year (“excluded year”). The discretion can be exercised, among other things, if the Commissioner is satisfied that:

  • the business will not become profitable in the period under review (ie, in this case, before 30 June 2017) because of its nature, and
  • there is independent evidence that justifies an objective expectation the business will produce assessable income within the period that is commercially viable for the industry concerned.

In this case, the Tribunal held that the taxpayer failed to meet the first of these tests. The evidence established a stud could become profitable before 30 June 2017; indeed, depending on the cost structure of the operation, it could become profitable as early as five years after establishment. The key variable is financing costs. If those costs are high – because the operation is funded wholly or partly by debt – then it will take longer for the operation to turn a profit. But there was nothing in the nature of the business that would stop it from becoming profitable at some point before the year of income ending 30 June 2017. In particular, there was nothing inherent in the business activities which demanded that they be financed by debt. It was therefore inappropriate to exercise the discretion in the taxpayer’s favour.

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