The AAT has affirmed the Commissioner’s decision to not exercise his discretion in relation to non-commercial business losses of a taxpayer’s cattle and sheep farming activities for the 2010 income year.
The taxpayer was a medical practitioner, who owned 2 farms, on which he conducted cattle breeding and sheep farming. In September 2010, he applied for a private ruling requesting that the Commissioner allow him to claim the losses from the farming activities against his medical practice. The Commissioner issued a private ruling, in which he refused to exercise his discretion under s 35-55 of the ITAA 1997. Notwithstanding the private ruling, the taxpayer then lodged his 2010 income tax return and claimed losses of id=”mce_marker”79,187 in relation to the farming business. The Commissioner disallowed the claim and the taxpayer lodged an objection.
Broadly, the taxpayer argued the Commissioner should exercise his discretion under s 35-55(1)(a) in relation to one of the farms due to special circumstances, namely drought. He also contended that the Commissioner should exercise his discretion under s 35-55(1)(c) in respect of his other farm due to that farm being a “start-up”.
In relation to the first farm [affected by drought], the AAT held that the taxpayer had not discharged the onus of proving, on the balance of probabilities, that but for the special circumstances, he would have produced assessable income greater than deductions.
It also held that the taxpayer did not discharge the onus of proving that the “start up” farm would produce assessable income greater than deductions within a commercially viable period for the industry.
The AAT said in relation to both farms the principle reason for there being no tax profit was the level of debt (both were highly negatively geared). Therefore, it held the taxpayer did not meet the conditions for the exercise of discretion under s 35-55 and the losses incurred in the 2010 year must be deferred.
(AAT Case [2013] AATA 331, Re Heaney and FCT, AAT, Ref No 2012/0264, Fice SM, 23 May 2013.)
[LTN 99, 24/5/13]
Section 35-55 of the Income Tax Assessment Act 1997
Commissioner’s discretion
(1) The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a * business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:
(a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or
Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.
(b) for an applicant who carries on the business activity who satisfies subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made–the business activity has started to be carried on and, for the excluded years:
(i) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35– 35, 35-40 or 35– 45; and
(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)); or
(c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made–the business activity has started to be carried on and, for the excluded years:
(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and
(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).
Note: Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.
(2) The Commissioner may, on application, decide that the rule in subsection 35-10(2B) does not apply to a * business activity for an income year if the Commissioner is satisfied that it would be unreasonable to apply that rule because special circumstances of the kind referred to in paragraph (1)(a) of this section prevented the activity from starting.
Note: This subsection is intended to provide for a case where a business activity would have begun to be carried on and satisfied one of the tests if it were not for the special circumstances.
(3) An application for a decision by the Commissioner under this section must be made in the * approved form.