The AAT has held it was not appropriate to exercise the non-commercial losses discretion in the taxpayer’s favour to allow losses from a cattle stud to be offset against other income of the taxpayer.

The taxpayer is an engineer. He earns in excess of $250,000 a year from his engineering work. In 2009, he established a cattle stud in partnership with his wife. He sought to offset expenses and losses from the stud against his income as an engineer in the year ended 30 June 2011. Under the non-commercial loss rules, the losses must be deferred pursuant to s 35-10 of the ITAA 1997 unless the Commissioner exercises the discretion in s 35-55(1)(c) to permit the taxpayer to include the losses in the calculation of his assessable income in the year of income in question. The Commissioner had refused to exercise the discretion and the taxpayer has asked the Tribunal to review that decision.

The Tribunal said the ruling noted that the taxpayer did not anticipate producing a tax profit until the 2017-18 year of income when his debt levels were reduced. The taxpayer said he would not produce assessable income until the year ended 30 June 2017 or 30 June 2018 because of the nature of the business.

The Tribunal noted that the Commissioner must address the matters in both limbs of the test in s 35-55(1)(c). Those limbs require that the decision-maker be satisfied:

  • the business will not become profitable in the period under review (ie 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.

The Tribunal said the taxpayer was unable to satisfy the test contained in the first limb, which made it unnecessary to consider the issues in the second limb. The evidence established a stud could become profitable in advance of 30 June 2017, the AAT said.

The Tribunal held 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. It was, in the Tribunal’s view, therefore inappropriate to exercise the discretion in the taxpayer’s favour.

(AAT Case [2013] AATA 407, Re Hefner and FCT, AAT, McCabe SM, AAT Ref: 2012/4992, 18 June 2013.)

[LTN 116, 19/6/13]