Edited version of your written advice

Authorisation Number: 1051364858227

Date of advice: 21 May 2018

Ruling

Subject: Non-commercial losses – horse breeding

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 losses from your business activity in the calculation of your taxable income for 20xx-20xx financial years?

Answer

No

This ruling applies for the following period(s)

20xx to 20xx financial years

The scheme commences on

1 July 20xx

Relevant facts and circumstances

You do not satisfy the income requirement in subsection 35-10(2E) ITAA 1997.

You carry on a business activity involving the breeding, racing and trading of X.

You have been involved in the business for over X years.

You sell, trade and race the prodigy of your breeding program.

The length of time it takes from the time X is serviced to the time when the prodigy are sold is x years.

The prodigy that you do not sell is used by you for racing.

You expect to make a profit in the 20xx financial year through servicing fees, race winnings and stock on hand.

You have provided a profit and loss statement, and projected profit and loss statement, for the 20xx to 20xx financial years.

Relevant legislative provisions

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

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

Reasons for decision

Paragraph 16B of Taxation Ruling 2007/6 (TR 2007/6) explains that the Commissioner may exercise his discretion under paragraph 35-55(1)(c) of the ITAA 1997 if, because of the nature of the business activity, it has not or will not produce an assessable income greater than the deductions attributable to it. Additionally, there must be 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 (apart from the operation of subsections 35-10(2) and (2C).

The note to paragraph 35-55(1)(c) ITAA states that it is:

…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.

Further, paragraphs 18 to 19 of TR 2007/6 explain that the 'lead time' discretion, provided for by paragraph 35-55(1)(c) of the ITAA 1997, is available where an inherent characteristic of the business activity has prevented the business from producing a tax profit in the initial period from when the activity commenced. Where this initial period has passed, any continuing failure to produce a tax profit will be for reasons other than that provided for in subparagraph 35-55(1)(c)(i). In that situation the discretion will not be exercised for the reason of lead time.

In the present case, your breeding business activity commenced in the 20xx financial year. Therefore, the lead time of x years required to breed your stock has passed. For this reason, the Commissioner is unable to exercise the 'lead time' discretion in paragraph 35-55(1)(c) of the ITAA 1997 with respect to the 20xx to 20xx financial years.

Further, as discernible from paragraph 35-55(1)(c) of the ITAA 1997, and explained in paragraphs 16B and 18-19 of TR 2007/6, the lead time discretion is not available once a business activity has made a tax profit. This is because it is then clear that there is nothing inherent in the nature of the business activity that prevents the making of a tax profit.

In the present case, your breeding business activity produced a tax profit in the 20xx financial year. For this reason, the Commissioner is unable to exercise the 'lead time' discretion in paragraph 35-55(1)(c) of the ITAA 1997 with respect to the 20xx to 20xx financial years.