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The Administrative Appeals Tribunal has upheld, on the facts in the case, the Commissioner’s refusal to exercise his discretion in s 35-55(1)(c) of the Income Tax Assessment Act 1997 (Cth) not to apply the non-commercial loss deferral rule in s 35-10(2).

The taxpayer applied to the Commissioner for a private ruling (PBR) on the exercise of his discretion in s 35-55(1)(c) not to apply the non-commercial loss deferral rule in s 35-10(2) and to allow the taxpayer to include losses from her horse breeding “business activity” in the calculation of her taxable income for the 2011-2012 to the 2017-2018 income years.

The Commissioner ruled that he would not exercise his discretion in s 35-55(1)(c), and the matter went to the Tribunal.

Section 35-10(2) prevents losses from a “non-commercial business activity” carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, and the losses are generally treated as deferred until the next income year in which profits from the non-commercial business activity arises, unless an exception applies. One exception is an exercise of discretion by the Commissioner, under s 35-55, the effect of which would be to allow the taxpayer to access non-commercial business losses in the income year in which they are incurred, instead of having to wait until the “business activity” generates profits to claim the losses.

The taxpayer had carried on a horse breeding activity since 2000. It was initially on a small scale. In the 2008 financial year, the taxpayer having developed the infrastructure and her skills and knowledge in the industry, a decision was made to acquire young horses of highly regarded international bloodlines, together with various embryos and semen samples from the United States and Europe. This was to add to the horses already acquired, to develop a major breeding program and assist in the selection of the horses acquired. There was evidence that the lead time for a horse breeding business is generally between 5 to 10 years, and for Arabian horses, being a more specialised breed, this could extend to 15 years. It was contended that the taxpayer had basically reset the clock in the 2008 year.

The Tribunal found that the taxpayer’s scheme, as described in the Private Binding Ruling issued by the Commissioner, was inadequate; nevertheless, the Tribunal was bound to take the scheme as it found it, and was not tasked with verifying the correctness of the facts identified in the scheme.

The Tribunal concluded that:

  • the scheme, as identified by the Commissioner in the PBR, did not include a new “business activity” which was commenced by the taxpayer in the 2007-2008 financial year
  • the scheme did not include any “objective expectation”, based on evidence from an appropriately qualified independent source, as to when a business activity which commenced in the 2007-2008 financial year would produce assessable income for an income year greater than the deductions attributable to it for that year as required by s 35-55(1)(c)
  • the taxpayer had not satisfied the Tribunal that the Commissioner’s opinion on the application of s 35-55(1)(c) to the scheme was incorrect
  • the Commissioner’s ruling on the scheme, as identified by the Commissioner in the PBR, was correct.

Re HVZZ and FCT [2015] AATA 133 (Senior Member CR Walsh, 5 March 2015).

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