Commissioner's discretion in section 35-55 of the ITAA 1997 - no objective expectation

Will the Commissioner exercise his discretion under paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the taxpayer, an individual, to include any losses from the taxpayer's live stock breeding business activity in the calculation of the taxpayer's taxable income?

No, the Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 because he is not satisfied that there is an objective expectation that the business activity will meet any one of the four tests in Division 35 of the ITAA 1997 or produce a taxation profit within a period that is commercially viable for the industry concerned. [Note: 'taxation profit' refers to the production of assessable income from the activity for an income year in excess of the allowable deductions attributable to it for that year, apart from any deduction arising under subsection 35-10(2) of the ITAA 1997.]

The taxpayer commenced a live stock breeding activity. The activity has produced only 'losses' in the first few years of its operations. [Note: 'loss' refers here to the excess of the allowable deductions attributable to the activity over any assessable income from it.]

The taxpayer has not provided any independent evidence of the commercially viable period for the industry concerned.

The taxpayer states that by the fifth year of operations the activity is expected to produce assessable income of at least $20,000 for the first time (hence meet the assessable income test in section 35-30 of the ITAA 1997) and also make a taxation profit. However, no independently sourced evidence is provided in relation to this statement and only limited details are given as to how this expectation, of the activity producing any assessable income in excess of the deductions, expected to be attributable to the activity is objectively based.

The activity has commenced, and is carried on by a taxpayer who is an individual, as a business in the years ended 30 June 2001 and subsequent years therefore, losses made from the activity will be potentially subject to the provisions in Division 35 of the ITAA 1997.

The activity will not meet any one of the four tests under Division 35 of the ITAA 1997 for several years and neither will the exception to the Division in subsection 35-10(4) of the ITAA 1997 apply. Losses made from the activity in these years will therefore be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable for this to occur.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 can only be exercised where: (i) the business activity has started to be carried on; and (ii) because of its nature it has not yet met one of the tests set out in Division 35 of the ITAA 1997; and (iii) there is an objective expectation based on independent evidence that the business activity will either meet one of the tests, or produce a taxation profit, within a period that is commercially viable for the industry concerned.

The discretion therefore is intended in such a case to be exercised for the income years from when the business first commenced until it could be expected to meet one of the four tests or make a taxation profit. This period has to be within the commercially viable period for the industry concerned.

The taxpayer has not provided any independent evidence to demonstrate what is the 'period that is commercially viable for the industry concerned' (subparagraph 35-55(1)(b)(ii) of the ITAA 1997). Additionally, the information the taxpayer has provided does not allow the Commissioner to conclude that there is an objective expectation that within any particular time the activity will either meet one of the tests or produce a taxation profit.

The Commissioner therefore is not satisfied that the requirements of paragraph 35-55(1)(b) have been met. He concludes accordingly that he cannot decide that it would be unreasonable for the loss deferral rule to apply and does not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.