Private ruling: Non-commercial losses - Commissioner's discretion
Date scheme commenced: 1 July 2004

Ruling: Q1: 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 horse breeding business in the calculation of your taxable income for the 2009-10 financial year? | A1: 

Relevant facts and circumstances: The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision: · your application for private ruling; and · further information which we received on 11 April 2011. You carried on horse breeding activities as a hobby breeder for many years. During the 2004-2005 income year you commenced your own thoroughbred breeding business. Your primary aim of the business is to develop a profitable business of breeding for public sale select thoroughbred stock with high pedigree. This involves purchases of well bred and/or well performed female stock. In some cases this may involve training and racing some of the stock as an intermediate phase with a view to establishing successful performance records, which will subsequently enhance their pedigree and the sales value of their progeny. You state that by its nature thoroughbred breeding requires a lengthy lead time to establish the desired level of proven performance. It is necessary in the start up phase to accumulate and build a quality portfolio and ensure high quality blood lines. It is the policy of your business to agist all stock on high quality commercial farms and to direct the application of capital to high quality stock rather than farm ownership. Your business plan states it will be necessary to provide for seed capital of approximately $3,000,000 over the estimated establishment period of 5-6 years. You extensively consult with prominent Australian and overseas breeders and bloodstock consultants in relation to the commercial viability of the industry. You regularly attend horse sales in Australia and overseas and undertake stud farm inspections in those countries in order to keep abreast of best practice standards in breeding. As at 30 June 2010 your stock on hand had a tax value exceeding $2 million and consisted of over 30 horses. All horses have been purchased for the purpose of a breeding career and all progeny are for sale except selected fillies which will be retained as future broodmares. These are selected on the basis of quality of type and pedigree. You regularly cull and add to your breeding stock as part of the gradual and ongoing process of establishing a successful nucleus of proven breeders. If the mares do not produce progeny with an acceptable level of quality (usually for 2 or 3 consecutive breeding seasons) they will be sold and replaced. Only one filly has been designated for retention on this basis since the business commenced. You state that, due to the significant initial outlay required to purchase stock as well as the lead time between purchase and maturity of stock, it is not uncommon for losses to be incurred in the first 7-10 years of operations. You expect to make a profit from your activities in the 2010-11 financial year, which is six years after the year of commencement. You have provided independent advice in the form of an article from a peak breeding body in Australia, 'Thoroughbred Breeders Australia', suggesting that eight years is the time taken to realise the full potential of broodmare stock. Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000.


Reasons for decision: Summary: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. The income requirement is set out in subsection 35-10(2E) of the ITAA 1997. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. In order to exercise the discretion, the Commissioner must be satisfied, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997). In your case, you do not meet the income requirement as your income for non-commercial loss purposes is above $250,000. However, you have supplied evidence from an independent source which has established that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a period that is commercially viable for this industry. Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income for the 2009-10 financial year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | This ruling applies for the following period: Year ended 30 June 2010 The scheme commenced on