Edited version of private advice

Authorisation Number: 1052241931955

Date of advice: 16 April 2024

Ruling

Subject: Non-commercial loss - special circumstances

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your dog breeding activities in your calculation of taxable income for the 20XX-XX financial year?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You provided details of your fulltime salary and wage position in an unrelated industry.

You obtained the relevant registrations and permits required for dog breeding in a previous year.

You commenced breeding a specific breed of dog as a hobby in a specified financial year. You provided details on how many litters were had in each financial year.

You registered for an ABN and commenced breeding as a business. You provided us with details on your business name and date you registered and commenced your business.

You provided us with details on the loss for your business activity for the relevant financial year. You provided a full breakdown of your expenses.

You expect the business activity to make a profit in the subsequent financial year as you plan to sell a specified number of litters. Each litter will have a specific number of dogs sold for a specified value.

You provided the breakdown of your projected expenses for the financial year in which you expect to make a profit.

The dogs were previously housed in a large single yard with Kennels considered as their shelter which met dog breeding regulations.

You commenced improving your infrastructure late during the ruling period. You provided us with details about the new infrastructure along when it was approximately completed.

You cap your losses of each litter at a specified value per puppy. This amount is sustained through personal cashflow and if the business ceases to be viable, you intend to sell the dogs and close the business.

You were unable to provide independent evidence from other breeders or the AA Dog Associated regarding lead times for dog breeding businesses.

You have been purchasing breeding dogs since a specific calendar year. You provided the number of male and female dogs you currently have for breeding. You also provided details on when the dogs were purchased, and how much they were purchased for.

You provided the ages of the dogs at the time the business commenced.

You provided the number of litters in the year following the ruling period.

You had a specified number of pregnant females due in a specified month, and you intend to have X more litters before the end of the 20XX-XX financial year.

You provided the date the first litter was born after the business commenced.

The first litter was not advertised for sale due to regular enquiries and an existing waiting list. Potential buyers were contacted directly off the waiting list.

You have a website which you can advertise on which provides sufficient traffic. Alternatively, you have the option to advertise on a registered purebred breeders' website for Australia and New Zealand.

You have retired a specified number of dogs in the financial year following the ruling period due to seaman quality and birth complications. They are otherwise healthy dogs and were sold for a specified amount as 'pet home' dogs.

You speak with the buyer over the phone, however there is no interview process, and the puppies are sold on a first in first served basis. You do not have contractual agreements with the purchasers. They are required to pay the full amount upfront to secure the puppy.

You are considering introducing non-refundable deposits as you grow to secure more sales.

The puppies can be picked up from the property, or you provide pet transportation options which are available to the buyers at their own cost.

You do not currently employ staff; however, you plan to employ staff in future as the business grows.

You do not intend to purchase more dogs but will keep puppies from your breeding stock that will be future breeders to reduce any further capital outlay.

You believe that you will scale your business and enquiries will grow from breeders and show dog people as puppies are sole on main register as opposed to pet home/limited register.

You provided us with details on the number of litters you intend to have per year. This schedule is reliant on the individual dog's heat cycle.

You have a business bank account used for transactions and a home office for record keeping and meeting customers.

You keep folders for each dog containing information such as Vaccination documentation, DNA assessment results, Certificate of pedigree, Microchip details etc.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•         the individual meets the income requirement, and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a));

•         an exception in subsection 35-10(4) applies; or

•         the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997 in the relevant financial year.

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where:

•         the business activity has started to be carried on but because of its nature it has not produced, or will not produce, assessable income greater than the deduction attributable to it; and

•         there is an objective expectation 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.

Where a taxpayer chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied.

The Commissioner's approach to exercising the discretion under section 35-55 of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion.

TR 2007/6 states that the lead time discretion provided by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a tax profit is inherent to the nature of the business and is not peculiar to your situation.

The lead time discretion is not intended to be available where the failure to make a profit or to meet a test is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or business choices made by an individual (for example, the size and scale of the activity, the hours of operation, and or the level of debt funding) that are not consistent with the ordinary or accepted practice in the industry concerned.

In this circumstance you possessed the minimum quantity of dogs required for breeding prior to commencing the business activity and made an individual business decision to commence breeding late in the financial year. It also appears that a significant contributor to the loss of the business in the relevant financial year is the substantial expenditure on improving your infrastructure. These improvements were not obligatory, as you already had sufficient infrastructure in place that met breeding regulations.

Your decision to begin the breeding at the end of the financial year and to improve the infrastructure in place prior to the breeding business would have impacted the length of time required before your business would receive income to make a profit. These are individual circumstances affecting the lead time rather than an inherent characteristic of the industry.

Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a tax profit, rather a business decision you have made.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the relevant financial year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).