Losses from farming activities to be deferred
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 year.
Background
The taxpayer was a medical practitioner who owned two farms on which he conducted cattle breeding and sheep farming. In September 2010, he applied for a private ruling, requesting the Commissioner allow him to claim the losses from the farming activities against his medical practice income. 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 $179,187 in relation to the farming business. The Commissioner disallowed the claim and the taxpayer lodged an objection.
The taxpayer argued that for the purposes of Div 35, the farms should be treated as discrete business activities and not a single farming business. He then contended that the Commissioner should exercise his discretion under s 35-55(1)(a) (ie where there are special circumstances outside the control of the operator of the business activity that prevent the four objective tests from being satisfied in the year) in relation to his sheep farm due to special circumstances, namely, drought. In addition, the taxpayer also argued that the Commissioner should exercise his discretion under s 35-55(1)(c) (ie business lead-time discretion) in respect of his cattle farming/breeding due to that farm being a “start-up”.
Decision
The AAT found that the activities conducted on each farm were sufficiently discrete to warrant individual consideration. It said Div 35 is concerned with losses from non-commercial business activities, not simply losses from non-commercial businesses. The AAT said the income and expenditures on each of the farms indicated that they were appropriately described as autonomous commercial undertakings, and that they should therefore be viewed separately in determining whether the Commissioner should exercise his discretion.
In relation to the sheep farm, 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. Based on the evidence presented, which included expert reports and agricultural information, the AAT said the main reason for the sheep farm not to have produced a profit was the level of debt carried by the taxpayer by way of mortgage on the farm. It said the taxpayer did not have sufficient disposable income to stock and operate the sheep farm at a tax profit.
Similarly, the AAT held that the taxpayer did not discharge the onus of proving that the cattle farming/breeding would produce assessable income greater than deductions within a commercially viable period for the industry. It said there was no evidence the taxpayer had the financial resources to produce a tax profit without incurring further borrowings, due to the cattle farm also being highly negatively geared. Therefore, it held that the taxpayer did not meet the conditions for the exercise of the discretion under ss 35-55(1)(a) and s 35-55(1)(c) in relation to both the sheep farm and the cattle farm. The AAT held that the losses incurred in the 2010 year must be deferred under s 35-10(2) until such time as those activities produce assessable income in excess of deductions attributable to the activities.
Re Heaney and FCT [2013] AATA 331, www.austlii.edu.au/au/cases/cth/AATA/2013/331.html.
