The AAT has affirmed the Commissioner’s decision not to exercise his discretion in s 35-55(1)(c) of the ITAA 1997 not to apply the non-commercial loss deferral rule to a taxpayer.
The taxpayer applied for a private ruling on the exercise of the Commissioner’s discretion 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 2011-12 to the 2017-18 income years. The Commissioner ruled that he would not exercise his discretion. The taxpayer’s objection was disallowed and the matter came before the Tribunal.
The Tribunal had to decide whether the Commissioner’s decision not to exercise his discretion was correct (as the Commissioner contended) or whether that decision “should not have been made or should have been made “differently” (as the taxpayer argued). After reviewing the matter, the Tribunal concluded that:
- the Scheme, as identified by the Commissioner in the private binding ruling, did not include a new “business activity” which was commenced by the taxpayer in the 2007-08 financial year;
- the Scheme, as identified by the Commissioner in the ruling, 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 2007-08 financial year (ie the scaling up of the horse breeding business) 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; and
- that the Commissioner’s ruling on the Scheme was correct.
(Re HVZZ and FCT [2015] AATA 133, AAT, File No: 2014/0530, Walsh SM, 5 March 2015.)
[LTN 49, 13/3/15]
The AAT has affirmed the decision of the Commissioner in a private ruling not to apply the non-commercial loss deferral rule in s 35-10(2) of the ITAA 1997, thus denying the taxpayer deductions for losses from her horse breeding “business activity” in the 2011/2012 to the 2017/2018 income years.
Facts – The taxpayer commenced owning and operating a horse breeding business in the 2000 income year. The ATO examined the taxpayer’s activities in the 2005 and 2006 income years and, after initially concluding that they did not constitute carrying on a business, conceded that her activities constituted carrying on a business for tax purposes. In 2008, the taxpayer expanded her horse breeding activities in ways that included significant capital investment, starting a breeding program and hiring a farm manager.
The Commissioner disallowed the losses from the taxpayer’s horse breeding activity in the taxpayer’s 2011/12 income tax assessment.
The taxpayer applied to the Commissioner for a private ruling on the exercise of the Commissioner’s discretion in s 35-55(1)(c) of the ITAA 1997 in relation to the 2011/2012 to the 2017/2018 income years. Under s 35-55(1)(c), the Commissioner may decide that the non-commercial loss deferral rule does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply the rule because the business activity has started and:
- it has not produced, or will not produce net income in relevant years, and
- there is an objective expectation, based on independent evidence, that the activity will produce net income within a period that is commercially viable for the industry.
The Commissioner issued a ruling that he would not exercise the discretion in s 35-55(1)(c). The taxpayer objected to the ruling, the Commissioner disallowed the objection and the taxpayer applied to the AAT for a review of the decision.
The taxpayer contended that the Commissioner should have exercised the discretion in s 35-55(1)(c) because she had commenced a new “business activity” from the 2008 year onwards, having expanded in it as described above. She said the business activity would not produce assessable income greater than the deductions in each of the relevant years but there was an objective expectation that it would do so within the commercially viable period for the industry, based on evidence from independent sources.
Decision – The AAT affirmed the Commissioner’s objection decision not to grant relief from the non-commercial loss deferral rule. It found that the scheme, as identified by the Commissioner in the private ruling did not include a new business activity commenced in 2008 and there was no objective expectation as to when the business activity which commenced in 2008 would produce assessable income exceeding relevant deductions for an income year.
AAT ref: [2015] AATA 133, C Walsh (Senior Member), 5 March 2015, Perth.
[IT 13/3/15]
Exclusions to the ‘non-commercial loss rules’
- assessable income test: the assessable income (including capital gains) for that year from the activity must be at least $20,000 (ITAA97 s35-30). If the business activity started or ceased during the year, this test is based on the taxpayer’s “reasonable estimate” of the amount that would have been the assessable income if the activity had been carried on for the whole year. This may involve consideration of factors such as the cyclical nature of the business, any orders received or forward contracts, and industry trends (TR 2014/14). Such income includes a farm management payment repaid during the year (ID 2004/112)
- profits test: the particular activity must have resulted in taxable income (disregarding any deferred non-commercial losses) in at least three out of the last five income years, including the current year (eg ID 2003/407). In the case of a partnership, an individual partner’s share of the assessable income and deductions of a general law partnership is included when calculating a profit, in addition to any assessable income and deductions of the individual attributable to the partnership activity outside the partnership (ITAA97 s35-35)
- real property test: the total reduced cost bases of real property or interests in real property used on a continuing basis in carrying on the activity (other than privately used dwellings and tenant’s fixtures: eg ID 2004/644) must be at least $500,000 (ITAA97 s35-40). Real property or interests in real property may be valued at the greater of the reduced cost base or market value, or
- other assets test: the total value of other assets (other than motor vehicles: eg ID 2004/11, ID 2005/188, ID 2005/203) used on a continuing basis in the activity must be at least id=”mce_marker”00,000 (ITAA97 s35-45). This comprises the written down value of depreciated assets, the tax value of trading stock and leased assets, and the reduced cost base of trade marks, patents, copyrights and similar rights.