Taxpayer's request for discretion to allow non-commercial losses refused - Heaney
27 May 2013
The AAT has held that there were no grounds to justify the exercise, by the Commissioner, of his discretion under s 35-55(1) ITAA 1997 (deferral of losses from non-commercial business activities) in favour of a taxpayer, a medical practitioner, who was also carrying on farming activities that were generating substantial losses.
Unless the discretion was exercised in his favour, the taxpayer was unable to offset the losses from the farming activities against his other income, because the taxpayer's taxable income (disregarding the farming losses) exceeded $250,000 - see ss 35-10(2) and (2E).
The taxpayer conducted farming activities at 2 properties in the 2010 income year. The taxpayer ran sheep on the first property and beef cattle on the second property. The Commissioner contended that the 2 farming operations should be regarded as a single farming business; however, the AAT found that the activities conducted on each property were sufficiently discrete to warrant individual consideration.
In relation to the first property, the taxpayer sought the exercise of the "special circumstances" discretion in s. 35-55 (1)(a) and, in relation to the second property, the exercise of the "start-up" discretion in s. 35-55 (1)(c).
In relation to the first property, the AAT held that the taxpayer had not discharged the onus of proving, on the balance of probabilities, that but for the special circumstances outside of his control (namely drought), he would have produced assessable income greater than the deductions attributable to the farming activities. In the opinion of the AAT, the evidence disclosed that the principal reason why the farming activities on the first property did not produce a tax profit was the level of debt carried by the taxpayer by way of mortgages over both properties.
In relation to the second property, the AAT held that the taxpayer had not discharged the onus of proving that within a commercially viable period for the beef cattle industry, the beef production activities conducted on the second property would produce assessable income for an income year greater than the deductions attributable to it for that year. This was due to the level of debt carried by the taxpayer and the limited financial resources he had available after servicing that debt. He needed to substantially increase the number of cattle carried on the second property and there was no evidence that he had the financial resources to do that without incurring further borrowing.
The Commissioner's decision disallowing the taxpayer's objection was affirmed.
Heaney and FCT  AATA 331 (23 May 2013)