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HALL v FC of T

Members:
R Hunt SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 360

Decision date: 18 April 2006

R Hunt (Senior Member)

Summary

1. Mr John Hall, the taxpayer and applicant to the tribunal, sought review of an objection decision, dated 3 August 2005, made by a delegate of the Commissioner of Taxation. The decision under review disallowed Mr Hall's objection to a private ruling concerning an olive growing venture he undertook in partnership with his wife. The private ruling was in respect to the appropriate exercise of the Commissioner's discretion under s 35-55 of the Income Tax Assessment Act 1997. The Commissioner's delegate ruled that the discretion should not be exercised to allow deductions from assessable income of associated expenditures over several income years. The tribunal has decided, for the reasons set out below, that the appropriate tax treatment of the expenses would not permit the exercise of the discretion in Mr Hall's favour. This means Mr Hall's application has not been successful.

Issues for determination

2. In determining whether or not the Commissioner's delegate should have ruled that he would not exercise his discretion under s 35-55 in the manner sought by Mr Hall, the issues arising for determination are:

  • (i) whether Mr Hall was, at the relevant time, carrying on primary production business, being the business of olive growing; and, if so,
  • (ii) whether the expenses incurred by Mr Hall were incurred in carrying on a business, being olive growing, and/or were expenses or outgoings of capital or of a capital nature or were of a private and domestic nature; and
  • (iii) whether the discretion conferred by section 35-55 of the ITAA 97 should be exercised in respect of Mr Hall's olive growing activity.

3. With reference to issues (i) and (ii) above, the Commissioner maintains that, for the years ended 30 June 2001 to 2007, the expenses related to Mr Hall's olive growing activity would not be deductible under section 8-1 (1)(b) of the ITAA 97 as a loss or outgoing necessarily incurred in carrying on a business.

4. Further, if a business was being carried on, the Commissioner argues that the discretion available, pursuant to section 35-55(1) of ITAA 97, should not be exercised so as to allow the inclusion of losses from such activity in the calculation of taxable income for the years ended 30 June 2001 to 2007. Mr Hall claimed that it was appropriate to exercise the discretion in his favour under both subs.35-55(1)(b) as well as under subs.35-55(1)(a).

Relevant legislation

5. The main provisions of the ITAA 97 relevant for this matter are:

"8-1 General deductions

  • (1) You can deduct from your assessable income any loss or outgoing to the extent that:

    • …

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    • (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

…"

Division 35 of the Act deals with the deferral of losses from non-commercial business activities. Section 35-1 provides the following explanation as to the purpose of Division 35:

"This Division prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred. The loss is deferred.

It sets out a series of tests to determine whether a business activity is treated as being non-commercial.

The deferred losses may be offset in later years against profits from the activity or, if one of the tests is satisfied or the Commissioner exercises a discretion, against other income.

Section 35-10 reads:

35-10 Deferral of deductions from non-commercial business activities

  • (1) The rule in subsection (2) applies for an income year to each business activity you carried on in that year if you are an individual, either alone or in partnership … unless:
    • (a) one of the tests set out in section 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) is satisfied for the business activity for that year; or
    • (b) the Commissioner has exercised the discretion set out in section 35-55 for the business activity for that year; or
    • (c) the exception in subsection (4) applies for that year.

  • Rule

  • (2) If the amounts attributable to the business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess:
    • (a) were not incurred in that income year; and
    • (b) were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on.

  • …

  • Exceptions

  • (4) The rule in subsection (2) does not apply to a business activity for an income year if:
    • (a) the activity is primary production business; and
    • (b) your assessable income for that year (except any net capital gain) from other sources that do not relate to that activity is less than $40,000."

The four tests referred to in s 35-10(1)(a) of the Act apply in the following circumstances:

  • (a) assessable income test (s 35-30): if the assessable income from the business activity for the year is at least $20,000;
  • (b) profits test (s 35-35): if for each of at least three of the five income years the sum of the deductions attributable to the activity for that year is less than the assessable income from the activity for that year;
  • (c) real property test (s 35-40): if the total reduced cost bases of real property or interests in real property used on a continuing basis in carrying on the activity in that year is at least $500,000;
  • (d) other assets test (s 35-45): if the total value of assets (calculated in accordance with s 35-45(2) and (4)) that are used on a continuing basis in carrying on the activity in that year is at least $100,000.

The discretion of the Commissioner referred to in s 35-10(1)(b) of the Act is set out in s 35-55(1), which provides:

"35-55 Commissioner's discretion

  • (1) The Commissioner may decide that the rule in section 35-10 does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

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      (a) the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or
    • (b) the business activity has started to be carried on and; for that or those income years:
      • (i) because of its nature, it has not yet satisfied or will not satisfy one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and
      • (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsection 35-10(2)).

Note: This paragraph 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.

Background

6. On 13 April 2005, Mr Hall, on behalf of himself and his wife, asked the Commissioner to issue a private ruling concerning their olive growing activity. In the application form, Mr Hall asked for the ruling as to whether the Commissioner would exercise his discretion under s 35-55. Mr Hall indicated, by marking a box under question 12 on the form, that that he wanted a ruling on the basis of the nature of the activity. The Commissioner's delegate sought more information and, on 12 May 2005, Mr Hall provided answers to the delegate's queries and additional documents. The delegate then issued a private ruling with a letter dated 3 June 2005. The ruling was to the effect that, in respect of the arrangement described in the notice of ruling, the discretion under section 35-55(1)(b) would not be exercised to allow Mr Hall or his wife to include any losses from their olive growing activity in the calculation of taxable income for any of the years of income ending 30 June 2001 to 2007. The ruling did not go into the discretion available under section 35-55(1)(a). The delegate also ruled that the date of commencement of the business was 1 July 2000.

Mr Hall's submission

7. Mr Hall told the tribunal that, in 1998, he and 90 or more others subscribed for shares in Hunter Olive Co-operative Limited, which then used the capital raised to construct a state of the art oil processing facility at Hebden for the purpose of crushing olives grown by the subscribers or members and marketing the oil produced. All of the 90 members had trees planted by 1998 and some owned olive trees planted some years before.

8. While Hunter Olive Co-operative Limited was quite successful with the oil that it produced, winning various awards and medals, as confirmed by the copy of the Information Memorandum in relation to the winding up of the Co-operative (a copy of which has been lodged) the Co-operative failed because, although over 90 plus members had trees with a range of maturity in 2004 of between 5 and 10 years, the fruit which members were able to deliver for processing declined from 60 tonnes in 2002 to 46 tonnes in 2004 with members that had significantly contributed to the 60 tonnes in 2002 having little to contribute to the 46 tonnes in 2004.

9. Mr Hall wrote that his understanding was that olive growers in areas other than the Hunter (particularly the lower Hunter) are achieving quite satisfactory crops from trees of the same variety, same age and grown by the same nursery (Olives Australia) with break even crops after year 3 and profitable crops thereafter. While Nevadillo Blanco olives in Australia appear to have some genetic problems, Mr and Mrs Hall's Nevadillo Blanco trees produced a good crop (which was harvested and delivered to the Co-operative) in 2003 and it is likely that a combination of drought, adverse weather (including very hot winds in October/November, which have burnt flowers) for the past few years, peculiar to the

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Hunter (particularly the lower Hunter) have been natural phenomena constituting special circumstances outside the control of Mr and Mrs Hall and peculiar to the Hunter region. This prevented the results planned for, after considerable research and the advice of a professional consultant, being achieved.

10. Quite simply, Mr Hall went on to explain, if he had undertaken exactly the same venture in New England or west of the Blue Mountains the venture would have broken even by year 3 and been increasingly profitable thereafter. Why the Hunter is different, no one is quite sure; nonetheless, many members of the Hunter Olive Cooperative Limited with trees growing in the Hunter experienced the problem. Mr Hall said he has also been told by Hunter growers with older trees, that while they achieved little or no crop in years 1-6, profitable crops were produced in years 7 or 8 and continued thereafter.

The application for the ruling

11. A copy of Mr Hall's application to the tax office for a ruling under s 35-55 is before me. In the boxes provided on the ruling application form, for the purpose of indicating the basis for the ruling sought, Mr Hall left the special circumstances option blank and ticked the box for a ruling on the basis of the nature of the activity. He indicated the business started in the second half of 1999 and asked for a ruling to cover the years of income commencing in the second half of 1999 and ending 30 June 2007. The activity he declared was one of olive growing. He said he expected a crop in 2007 with fruit set in 2006 and the majority of the proceeds received in 2008.

The arrangement identified in the private ruling

12. The arrangement and activity described in the ruling was identified as one of primary production. The ruling set out the location and size of the properties on which the primary production activity was taking place as well as a history of events. The ruling noted that Mr and Mrs Hall had stated the business commenced in the second half of the 1988 calendar year. This was the year when the business name was registered, a sales tax registration was obtained and 220 olive trees were ordered for planting. The ruling went on the recite that 220 Frantoio olive trees were planted on 1 hectare at Laguna/Murrays Run in March/April 1999. This planting was followed in the second half of the 1999 calendar year with planting of 2,500 trees on 10 hectares at Wylies Flat. Approximately 200 of those trees had since died. The varieties planted at Wylies Flat were an equal number of Nevadillo Blanco (an oil producing variety) and Manzanillo (a dual purpose variety). The ruling continued, noting Mr and Mrs Hall operated the farm in partnership trading as JMH Olives.

13. Then the ruling referred to the partners' intention to sell fruit for table and oil production and to prepare and sell table olives. The ruling went on to summarise further statements of Mr and Mrs Hall as understood by the delegate. He noted the fruit set expectation generally was that it occurred in October/November whilst the harvest would occur in the following May. Further, the majority of the proceeds from the sale of the crop would be received in the same income year as the harvest takes place, that is, before the end of June. With respect to olive production, he noted the Hunter Olive Co-operative had a minimum batch size of approximately 400 kilograms and that in the years prior to 2001-02 the small quantities grown were insufficient to meet the minimum. He recited that, in 2001-02, Mr and Mrs Hall had a crop of less than 400 kilograms of Nevadillo Blanco and about 1,500 kilograms of Manzanillo. However, these were abandoned following the withdrawal of a buyer. Accordingly, it was not until 2002-03 that Mr and Mrs Hall made the first sale, when 135 kilograms of a crop of about 400 kilograms of Manzanillo were sold to a table olive processor. The Nevadillo Blanco crop was less than 400 kilograms and was not harvested. In 2003-04, a crop of over 400 kilograms of Nevadillo Blanco was produced of which 400 kilograms were delivered to the co-operative for processing into oil. About 600 kilograms of Manzanillo were produced, with 320 kilograms sold to a table olive processor, and 200 kilograms retained for processing into table olives by Mr and Mrs Hall. These were now ready for sale. The 220 Frantoio trees at Laguna/Murrays Run had produced virtually no fruit.

14. Documents listed in the ruling were said to provide information outlined as:

  • • the commercial purpose or character of your activity;

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  • • the date when your activity commenced;
  • • your intention to make a profit;
  • • the repetition and regularity of your activities;
  • • how your activities are carried on in a manner based around business methods and procedures of a type ordinarily used in ventures that would commonly be said to be businesses;
  • • how your activity is carried out in a systematic and organised manner;
  • • how your activity differs from those normally considered to be hobbies or recreational pursuits;
  • • the research conducted and advice you received;
  • • the sales and marketing research you have undertaken, and/or
  • • the independent evidence you have obtained supporting your yield and profit projections.

15. Next, the ruling set out a table, by reference to profit and loss statements for the 1998-99 to 2003-04 income years, as follows:

Profit and loss statements
Profit and loss statements
Income Year Item 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04
Income            
Sales         337 770
Total Income Nil Nil Nil Nil 337 770
Expenses            
Accountancy Fee 193 6,080   3,840    
Advertising         107  
Bank Charges 250 576 448 554 584 611
Consultancy Fees 135 1,188        
Chemicals & Sprays 291 1,322 552 442 151 529
Contractors & Consultants         570 1,232
Depreciation 21,332 33,386 35,388 13,959 5,672 3,617
Electricity 448 1,046 754 682 846 817
Farm Supplies         1,268 1,078
Fuel and Oil 69 545 755 559 732 496
General Expenses   539 403 33    
Insurance 1,518 3,136 2,184 1,074 654 2,207
Interest Paid 7,619 21,096 22,701 19,001 19,784 20,619
Permits, Licenses & Fees 406 101 114 281 305 453
Plant & Equipment< $300   2,326 980      
Postage, Printing & Stationary 425 78 43      
Rates & Taxes 380 853 2,218 3,224 1,809 2,313
Registration Fees 56          
Rent 752 946     412  
Repairs & Maintenance   4,249 1,493 3,314 373 757
Staff Amenities   446        
Subcontractors     210     2,646
Subscriptions 100 110 262 480 1,515  
Telephone 84 39        
Tools 370          
Total Expenses 34,433 78,010 68,511 47,448 34,789 37,379
Net Loss 34,433 78,070 68,511 47,448 34,452 36,609

16. Then, the ruling set out revised income and expenditure projections as follows:

Income and expenditure projections
Income and expenditure projections
Income Year Item 2004-05 2005-06 2006-07 2007-08
Income        
Yield (kgs) 1,333 1,333 1,333 167,500
Price $0.75 $0.75 $0.75 $0.75
Total Income 1,000 1,000 1,000 125,525
Expenses        
Operating Costs 23,430 28,640 33,880 39,160
Interest 20,000 20,000 20,000 20,000
Total Expenses 43,430 48,640 53,880 59,160
Net Profit       66,465
Net Loss 42,430 47,640 52,880  

Lead time and financial assumptions

17. The ruling next dealt with "lead time" and stated that independent evidence Mr Hall provided showed "the financial assumptions for a fully irrigated oil-only grove prepared by Hunter Olive Grove Services and the financial assumptions for an irrigated olive orchard prepared by Olives Australia…". The ruling observed these documents both suggested the commercially viable period for the olive growing industry was "4 years from the time of planting at which time the first crop is expected". Further, in support of Mr Hall's claim that low yields were characteristic of the Nevadillo Blanco variety of olive tree, the ruling acknowledged a copy of the official journal of the Australian Olive Association "The Olive Press" for Autumn 2004 containing an article titled "Fruit set-what happened this year?" by Leandra Ravetti. The Leandra Ravetti article was described as discussing cross pollination, rain at flowering time and flower development. Quotes set out in the ruling read:

"In some years certain varieties may not develop enough perfect flowers to give a satisfactory crop - even though it has produced a heavy bloom - because most of the flowers are staminate.

This seems to be the case for the 'Australian' Nevadillo Blanco. Since I moved to Australia, I have heard many contradictory reports regarding the performance of this variety. While the famous Mildura trial plot indicates a relatively consistent record of good crops, many growers complained that their Nevadillo trees flowered profusely but the fruit set was extremely disappointing. These extremely opposing situations encouraged us to carry out some specific research in order to explain the situation more clearly. The most important aspect that was determined in this research is the fact that Nevadillo Blanco shows genetically an extremely high percentage of imperfect flowers, usually higher than 90 per cent. With these levels of imperfect flowers, perfect cross-pollination,

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excellent nutritional and water management, and ideal environmental conditions are essential to guarantee a normal set. To make matters worse, Nevadillo Blanco shows an early flowering period in most environmental conditions. This early flowering makes an overlap of good flowering and cross-pollination with varieties like Frantoio (Paragon) almost impossible because of Frantoio's late flowering characteristics. The case of the Mildura trial plot, the excellent environmental conditions for growing olives in that area of northern Victoria, and the fact that the Nefadillo Blanco trees are surrounded by more than 20 different varieties within a 50 metre radius obviously minimises the genetic problems of this variety."

18. The ruling next referred to revised income and expenditure projections recorded above and set out expected income of $1,000 for each of the 2004-05, 2005-06 and 2006-07 income years increasing to $125,625 in the 2007-08 income years. The delegate calculated that, at a price of 75 cents per kilogram, these income figures translated into sales of 1,333 kilograms and 167,500 kilograms in the respective income years. In support of this increase in yield it noted Mr Hall quoted the treasurer of the Hunter Olive Co-operative who said that the "first decent crop" she had from her Frantoio trees was in year 7. The ruling also referred to a copy of the May 2005 edition of "The Olive Hunter", the newsletter of the Hunter Olive Association, containing an article titled "Harvest 2005 at Belford Green Olives". The article begins "It is either feast or famine - this year it was an extraordinary feast." The ruling also noted the article as to crop yield said: "Mostly one bin (20 kg) per tree was sufficient, occasionally 2 bins had to be used"; and "On average one tonne per day was harvested with the trees averaging about 15 kg each."

Review of the private ruling

19. In undertaking review of a private ruling, the tribunal's is concerned with the arrangement identified in the ruling and the tribunal cannot take into account new information or new grounds not before the delegate at the time of making the ruling. The Full Court of the Federal Court of Australia in
Federal Commissioner of Taxation v McMahon and Another 97 ATC 4986 described the tribunal's role and function. About the private ruling system, Lockhart J said (at 4989):

"The private ruling provisions were introduced to assist taxpayers who are uncertain about the tax effect of an arrangement that is proposed, commenced or completed and who wish to obtain a ruling from the Commissioner on this question before the assessment process is complete. It enables taxpayers to order their affairs with a degree of certainty about their tax implications before they embark or while they are embarking, upon courses of conduct, the tax implications of which may not be known for a considerable time. Private rulings may be sought upon facts which may turn out to be not the true facts at all. In that sense they may be sought upon hypothetical facts."

20. As to the tribunal's task, Lockhart J pointed out (at 4990):

"If a taxpayer seeks a review of the private ruling before the tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling. That arrangement is constant throughout the process of the private ruling and any review or appellate process that ensues."

21. In accordance with the principles set out by Lockhart J, I may form an opinion as to how the tax law operated or would operate on the facts that constitute the arrangement; and I may disagree with the Commissioner and alter the objection decision. However, I am not dealing with actual facts. I am dealing with a hypothetical set of facts identified in the ruling. They may amount to the same thing but, as His Honour observed, the bases of a private ruling are not necessarily the facts that will underlie the making of any ultimate assessment.

22. His Honour went on to explain:

"Once the ruling is made, it is made with respect to the facts that are identified for the purposes of the private ruling itself. In my opinion on a process of review the tribunal cannot redefine the arrangement. The tribunal is limited to the facts that constitute the arrangement as identified by the

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Commissioner in his own ruling. I agree with the submission of counsel for the Commissioner that the arrangement is a 'constant' and a ruling is about how a tax law applies to that arrangement."

No special circumstances

23. The years of income covered by to the ruling are set out as the years ending 30 June 2001 to 30 June 2007 The ruling then set out that it dealt with the Commissioner's discretion under s 35-55(1)(b). Before the tribunal Mr Hall argued that the Commissioner's discretion under s 35-55(1)(b) to permit deferral of deductions from non-commercial business activities should be exercised in his favour. In addition, in his objection and before the tribunal, Mr Hall asked for consideration under s 35-55(1)(a) although he had not requested a ruling on this basis and it was not considered in the ruling under review. As noted above, Mr Hall had not asked for ruling on the basis of special circumstances. The ruling did not identify any special circumstances. As Mr Hall did not indicate in his application for a ruling that he was asking for consideration of special circumstances and the ruling did not therefore consider any special circumstances, I have not taken any evidence of such circumstances into account in determining whether the ruling under review was inappropriate. This procedure accords with the practice advocated by the court in McMahon's case.

No meeting of tests in s 35-10(1)(a) for deferral

24. After identifying the subject of the ruling and the arrangement, profit and loss statements, income and expenditure projections, the ruling made an observation about the tests that may apply in respect to the discretion. When Mr and Mrs Hall objected to the ruling, on 16 June 2005, in a letter signed by Mr Hall, they set out that this was correct and was the reason they applied for a ruling on the exercise of the discretion. It follows that that I am satisfied that the ruling was correct in dismissing consideration of the Commissioner's discretion in terms of the tests referred to s 35-10(1)(a).

The Commissioner's discretion

25. Finally, the ruling posed the question:

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your olive growing activity (described above) in your calculation of taxable income for the 2000-02 to the 2006-07 income year inclusive?

The answer to this question was "No".

26. The tribunal will address the answer to the question of the application of s 35-55(1)(b) below after dealing with some preliminary matters as to the ambit of the ruling.

Date of commencement of business

27. The date of commencement of business, according to the ruling, was 1 July 2000. When Mr Hall sought the private ruling, he indicated in the application form that he and his wife were seeking a ruling covering their activity from the second half of 1999. In his letter dated 12 May 2005 in response to the Commissioner's request for more information, he wrote that he and his wife planted trees in 1998 and 1999. Mr Hall wrote that he could find no statement that business commenced in 1999, despite the date he specified in the application, and said the business commenced in 1998. The profit and loss statements tabled in the ruling commence at the 1998/1999 year and show nil income with expenses totalling $34,433 and a net loss of the same amount. The ruling goes on to recount Mr and Mrs Hall's activity in 1998. These steps were registration of the business name, sales tax registration and the ordering of 220 olive trees for planting. The ruling went on to recount that in March/April 1999, Mr and Mrs Hall planted 2,500 trees. The material before me notes the harvest prior to 2001/2002 was insufficient to meet the minimum.

28. The ruling does not fully explain why the delegate took the commencement of business as 1 July 2000 rather than 1 July 1998 or 1 July 1999. It refers to "lead time" in earlier paragraphs of the ruling and sets out financial accounts and projections from 1998. Nevertheless, in my view, Mr and Mrs Hall's activity before 1 July 2000 was a series of preliminary steps only. Any activity towards an expectation of meeting production targets for a commercial return was well off. The ruling noted that Hunter Olive Co-operative had a minimum batch size of approximately 400 kilograms and that in the years prior to 2001-02 the small quantities grown were insufficient to meet the minimum. It was not until the 2007-08 income years that any commercial return was

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expected according to the hypothetical figures before the delegate. There was an expected income of $1,000 for each of the 2004-05, 2005-06 and 2006-07 income years increasing to $125,625 in the 2007-08 income years. These figures make it clear that the first year of any commercial business was, at best, the financial year 2007/2008. As to potential exercise of the discretion, the later date of commencement of business found in the ruling is of little adverse consequence to Mr Hall as it reduces the lead time for consideration of deferral of losses. Lead time accepted is 4 to 5 years only and, if 1998 were taken as the date of commencement, this would make lead time 9 years, well outside expectation for exercise of the discretion.

For which years of income is the objection decision reviewable?

29. In view of my findings above that the lead time involved between 1998, 1999 and 2000 to the first profit expectation arose in 2007/2008, I find that the discretion should not be exercised for the years 1998 to 2000 as they exceed the lead time of 4 to 5 years dealt with in more detail in regard to the years 2002, 2003 and 2004 below. In this respect, I have varied the ruling but have come to the same end result that exercise of the discretion is inappropriate for these years. The ruling excluded the years 1998 to 2000 for the reason that the delegate found business had not yet commenced. Mr Hall has not succeeded in his objection either way.

30. The tribunal may not review an objection decision once an assessment has issued as explained in the reasons set out later in this decision under discussion of the years 2002 onwards. However, the Commissioner did not issue an assessment of tax for 2001 and issued a refund notice for 2001 (T17-280). The Commissioner issued an assessment of income tax for the year ended 30 June 2002 on 17 July 2003 (T19-292). For the year ended 30 June 2003, the Commissioner's assessment issued on 14 July 2004 (T21-304). An amended assessment for that year issued 4 November 2004 (T23-308). The assessment for 2004 issued on 27 April 2005 (T25-320). Both parties have made reference to Mr Hall having objected to these assessments although objection letters are not before me. The tax office letter of 29 June 2005 explains that Mr Hall must choose between an objection to the ruling or objections to the assessments. Mr Hall proceeded with his objection to the ruling as detailed below.

The year ending 30 June 2001

31. As no assessment issued for the year 2001, the tribunal is able to review the objection decision about the ruling for this year. The ruling found that the Commissioner should not exercise the discretion under s 35-55(1)(b) in the year ending 2001. I have reviewed this opinion in light of the hypothetical facts taken into account in the ruling. Mr Hall set out that he based his objection on the opinion that his operation was commercially viable and that 8 to 9 years was a realistic estimate for the first substantial crop. He furnished articles and the like to back up this opinion. Mr Hall quoted the treasurer of the Hunter Olive Co-operative who said that the "first decent crop" she had from her Frantoio trees was in year 7. Mr Hall has not challenged these references in the ruling but has concentrated on explaining the difficulties for olive growers and, in particular, growers in the Hunter region. The ruling noted in paragraph 6 under "lead time" that the independent evidence Mr Hall provided suggested a commercially viable period for the olive growing industry would be 4 or 5 years from the time of planting, at which time the first crop was expected. Mr Hall, by contrast, wrote in his application for the ruling that trees were planted in 1998 and 1999 and that a viable crop was expected in May 2007. He added that the "majority of proceeds" was expected in the year ending 30 June 2008. Financial figures and projections tabled in the ruling are consistent with this lead time. In paragraphs 13 and 17, the ruling noted that Mr Hall advised that planting of trees had commenced in 1998 and accepted that this had occurred. Mr Hall had also disclosed that conditions in the Hunter Valley meant that it would take 8 to 9 years for a commercial crop to eventuate. As the olive growing activity for the year ending 2001 was unlikely to produce any commercial crop within 4 to 5 years, and this was ascertainable from the material before the delegate, I agree with the private ruling in respect of this year and find that the activity should not provide the basis for the exercise of the discretion in s 35-55(1)(b) in favour of Mr Hall.

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The effect of the issue of income tax assessments for 2002, 2003 and 2004

32. As set out above, the Commissioner issued assessments of income tax for the years ended 30 June 2002, 2003 and 2004 before Mr Hall applied for review of the decision on his objection to the private ruling, on 16 June 2005. The materials before the tribunal show the tax office advised Mr Hall in writing on 29 June 2005 that s 14ZVA of the TAA 1953 precluded him from objecting to the private ruling once assessments had issued. The letter suggested he may wish to withdraw his objection to the ruling and pursue the objections to the assessments issued. The letter also pointed out that any objection should include the signatures of both partners if both partners wished to be included. The letter further noted that Mr Hall had provided revised income and expenditure projections for certain years and it asked for more information. Finally, in the penultimate paragraph, the writer suggested that Mr Hall may wish to provide this information with the objection to the assessments or, if he wished to proceed with the objection to the ruling, he should assist as soon as possible, for that purpose.

33. The evidence before the tribunal suggests Mr Hall and his wife had lodged objections to the assessments based on individual partnership returns for some of the years in question but later withdrew these objections. The objections to assessments for 2000/2001 and 2003/2004 are referred to in the tax office letter dated 29 June 2005 addressed to Mr Hall c/-his tax agent along with the suggestion that he might like to withdraw the objection to the ruling and proceed with those concerning these assessments. Mr Hall told the tribunal he did not understand that it would have been preferable to object to individual assessments once they had issued rather than the private ruling. He told the tribunal that someone at the tax office suggested he should withdraw the objections to the assessments and proceed with the objection to the ruling. Tax office notes before me show that the case officer "stopped the clock" on the private ruling request on 29 June 2005 after phone conversations with both Mr Hall and his agent. However, the decision on the objection to the private ruling proceeded after receipt of a letter from the tax agent dated 25 July 2005, which said that Mr Hall wished to proceed with the objection to the ruling.

34. When Mr Hall objected to the private ruling on 16 June 2005, his right of objection was qualified by s 14ZAZA(2)(a) of TAA 1953, which provided that "a rulee may not object against a private ruling if … an assessment has been made in relation to the rulee in respect of the year of income …, and in relation to the arrangement, to which the ruling relates." This means that Mr Hall cannot proceed with his objection to the ruling for the years 2002, 2003 and 2004. Assessments had already issued for these years on 17 July 2003, 14 July 2004 and 27 April 2005 respectively, that is, before he lodged his objection to the ruling on or about 16 June 2005. The result is that the tribunal cannot find in favour of Mr Hall regarding his objection to the ruling for the years 2002 to 2004.

35. Section 14ZAZA was repealed by Act No 161 of 2005 in respect to things done on or after 1 January 2006. Therefore, it does not apply to Mr Hall's objection to the ruling in respect of later years. Instead, Mr Hall would encounter another difficulty if he wished to object to later assessments because of s 14ZVA. This section limits objection rights where there is an objection against a private ruling.

Things done after 1 January 2006 and the application of Part IVAA

36. I have adopted the explanation of the Commissioner's counsel as to the application of Part IVAA. The private rulings and corresponding objection decisions were all made under the Taxation Administration Act 1953 (TAA) Pt IVAA. Since the institution of the present application for review, that part has been repealed (Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 with royal assent 19 December 2005). New provisions governing private rulings are now located in TAA, Schedule 1, Division 359, supplemented by some of the general rules in Division 357, applicable to things done on or after 1 January 2006.

37. The transitional provisions in the 2005 Act specify that a private ruling in force immediately before 1 January 2006 has effect, on and after that day, as if it were a private ruling made under Division 359, for which purpose the ruling is taken to have been made

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on the day when it was originally made (Schedule 2, cl 29(2) and (4)) and that an application for a private ruling made before 1 January 2006 and not decided before that day has effect thereafter as if it were an application for a private ruling under Division 359 (cl 31) to be dealt with under that Division. There is no corresponding provision applying the new law to pending objections, reviews or appeals. The relevant provisions of Part IVAA are therefore preserved by section 8 of the Acts Interpretation Act 1901 for the purpose of determining an outstanding review of an objection decision in relation to a private ruling made before 1 January 2006 (cf
Esber v. Commonwealth (1992) 174 CLR 430).

38. This outcome also accords with the normal regime under the Administrative Appeals Tribunal Act 1975 (AAT Act), section 43(6), which provides that a decision of the tribunal shall take effect from the day on which the decision under review (the objection decision) has or had effect unless the tribunal otherwise orders.

39. Section 14ZAZA operates in tandem with section 14ZVA to prevent multiple objections and to establish priority of assessment objections over ruling objections. Before there is an available assessment, the taxpayer may object to a ruling and, if the taxpayer does so, section 14ZVA precludes later assessment objections that were or could have been taken in the ruling objection. After an available assessment, the taxpayer's objection rights attach only to the assessment. The requirement of section 14ZAZA(2)(a) that the assessment be "in relation to the arrangement, to which the ruling relates" requires no more than that the arrangement was relevant to the assessment, in the sense that the arrangement actually existed and the tax consequences of the arrangements (e.g. the inclusion or non-inclusion of amounts in assessable income or in allowable deductions for a particular year) were relevant to the matters assessed, namely the relevant taxpayer's taxable income and/or tax payable thereon for the subject year of income (Income Tax Assessment Act 1936, section 166).

40. The application of ITAA 1977 section 35-55(1)(b) to Mr Hall in respect of his olive growing activities in respect of each of those years for which he had an assessment was relevant to both the amount of taxable income and the tax payable thereon in respect of that year, in that the favourable exercise of the discretion would bring current year losses to account as allowable deductions. The application of that provision in respect of the 2001 income year (for which there was no assessment) was relevant of the amount of taxable income and the tax payable thereon in respect of the next year in which he had an excess of assessable income over allowable deductions because the exercise of the discretion in respect of 2001 losses would free those losses from the quarantining effect of section 35-1-(2). This would enable them to be included in the general body of carried forward tax losses to be set off against net income unrelated to the business activity to which they were attributable.

41. As I have already found, at the time of Mr Hall's objection, on 16 June 2005, section 14ZAZA(2)(a) precluded those objections in respect of the subject income years up to and including 2004. Further, the 2003 amended assessment took account generally of unused deferred non-commercial losses in respect of the subject activity, regardless of the year in which they were originally incurred: all non-commercial losses that are not capable of being deducted in a particular year are carried forward from year to year under ITAA 1997 section 35-1-(2) as deductions attributable (in terms of Division 35) to the same business activity. Again, in 2004, the Commissioner recognised a deferred loss (T25-320) arising from the 2004 and earlier income years.

2005 and subsequent income years

42. The only review remaining properly before the tribunal is the objection in relation to the 2005 and subsequent income years. Section 359-60 of Schedule 1 replaces section 14ZAZA from 1 January 2006. It precludes an objection to a private ruling if there is an assessment for the relevant rulee for the income year to which the ruling relates, whether or not that assessment is also in relation to the arrangement (or "scheme", in terms of the new provisions) to which the ruling relates. As no assessment for 2005 and beyond had issued at the time of the objection, the tribunal may review the correctness of the objection decision for those

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subsequent years identified in the ruling, being 2005 to 2008.

43. Under the new provisions in Schedule 1, Division 359, the Commissioner has limited power to consider "additional information" when considering an objection, but still does not have a fact finding role. If the Commissioner considers that "additional information" shows the scheme to which the original application related is materially different from the scheme to which the ruling relates, the objection is treated as a nullity and the rulee may apply for another private ruling (section 359-65) or object to a relevant assessment. The Commissioner's ruling on questions of law is still issued on the basis of information provided.

44. The four tests referred to in s 35-10(1)(a) of the Act apply in the same way for these later years of income as in the findings for previous years considered above. While Mr Hall before the tribunal and in his objection against the ruling (T7-216) sought to rely on ITAA 1997 section 35-55(1)(a), which confers a discretion to be exercised on the basis of "special circumstances" this was not a matter before the delegate when he issued the private ruling. The application for ruling proceeded on the basis of the "nature of the activity" in terms of section 35-55(1)(b) (T3-23) for the reason that Mr Hall had not originally claimed any special circumstances. The ruling therefore applied paragraph 35-55(1)(b) with the consequence that Mr Hall had no right of objection on the basis of paragraph 35-55(1)(a). Therefore, special circumstances are not taken into account by me for the review in respect to later years of income as well as the years already discussed.

45. In order for the discretion in section 35-55(1)(b) to be exercised in favour of a taxpayer in respect of an income year for a particular business activity, the following are required:

  • a) that the activity in question is a business activity;
  • b) that the business activity has commenced and is being carried out;
  • c) that, in relation to the subject year, the business activity has not satisfied one of the four tests referred to in section 35-55(1)(b)(i) (which are also the tests by reference to which section 35-10(1)(a) operates) if the subject year is past, or will not satisfy one of those tests if the subject year is not past;
  • d) that it has not done so or will not do so (as the case may be) because of its nature;
  • e) that there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either:
    • i) meet one of the four tests referred to in section 35-10(1)(a), or
    • ii) produce assessable income for an income year greater than the deductions attributable to it for that year (disregarding section 35-10(2), which relates to the attribution of losses carried-forward from an earlier year);
  • f) that the Commissioner be satisfied that, because of the above matters, it would be unreasonable to apply the non-commercial loss deduction deferral rule in section 35-10.

46. The four tests referred to in sections 35-55(1)(b)(i) and 35-10(1)(a) are the assessable income test in section 35-30 (assessable income from the activity for the year at least $20,000), the profits test in section 35-40 (profits in 3 years of last 5), the real property test in section 35-40 (business uses real property of cost base or value at least $500,000) and the other assets test in section 35-50 (business uses certain other assets valued at, at least $100,000). Mr Hall has argued none of these tests other than the first and there is no suggestion that any other test requires active consideration in this case.

47. The Commissioner formed his opinion in the ruling on the basis that the criterion in section 35-55(1)(b)(ii)) was not satisfied in that there was no objective expectation based on the evidence from independent sources provided by Mr Hall that, within a period that is commercially viable for the olive growing industry, the activity would either satisfy one of the four tests or produce a single-year profit. In light of this conclusion, no other consideration was necessary for the ruling to [sic]

48. 

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Unfortunately, Mr Hall's own projections for the 2005 and 2006 years are for similarly minute yields and income to those in the earlier years. His stated projection for the 2007 year is for assessable income at the same low level ($1000). His expectation of income for the 2008 year is the first year likely to show a reasonable return ($125,625). The profit and loss accounts supplied show continuing and substantial injections of capital by the partners. They reveal the following:
Income Year 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04
Net loss 34,433 78,070 68,511 47,448 34,452 36,609
Cumulative losses   112,503 181,014 228,462 262,914 299,523
Capital injections by partners 43,304 76,199 31,541 35,750 29,903 34,020
Reference T5-161 T5-155 T5-137 T5-124 T5-112 T5-107
Cumulative capital injections   119,504 151,045 186,795 216,697 250,717

49. Mr Hall's stated expectation of 2008 gross income is not objectively supported by the information supplied, particularly in light of the minimal results to date and the uncertainty attending the causes of that low production, whether those problems can be overcome and, if so, when. This means his stated expectation is highly speculative. While the increasing age of his trees tends to increase the likelihood of production of a substantial crop in the future, he has not established an objective expectation of improvement based on independent evidence that the business will pass the assessable income test or return a single-year profit in the 2008 income year. As well, even if upon an objective assessment, the business might be expected to return its first profit or assessable income of $20,000 for the first time, in 2008, the lead time in excess of a "commercially viable" period for the industry is excessive in terms of the criteria for exercise of the discretion in Mr Hall's favour. The lead time for the olive industry is normally 4 or 5 years according to independent evidence and Mr Hall's own understanding. He has argued that the Hunter Valley requires a longer lead time but this is not an objective expectation. It follows that, as the objective expectation in section 35-55(1)(b)(ii) is not present, the ruling is correct. No further finding is required on my part to uphold the ruling.

The nature of the business activity

50. Although it is unnecessary to take the objection further in view of the finding that the activity does not meet an objective expectation, I have briefly considered other aspects of the ruling. In addition, Mr and Mrs Hall's activity Section 35-55(1)(b)(i) requires that the failure of the business to satisfy one of the four tests referred to "must be a result of some inherent characteristic that the taxpayer's business activity has in common with business activities of that type" (
Commissioner of Taxation v Eskandari (2004) 134 FCR 569, 578).

51. In the objection decision, the Commissioner expressed the view that he was not satisfied that the activity had failed to satisfy one of the tests "because of its nature". The Commissioner concedes that it is an inherent characteristic of olive trees that they do not bear fruit immediately and that, when they commence to bear, their yield is initially modest and increases until it reaches a plateau. The information provided indicates different figures for expected yields, but the actual yields achieved to 2004 (according to information provided) are well below any of these expected yields. As already noted, Mr Hall contends that Hunter region olives take longer to bear commercial quantities of fruit than olive trees elsewhere. Not only is this not objectively demonstrated by the information provided, but the extent of any difference between the Hunter and other places is not reliably quantified. The information provided indicates a range of potential causes for the delay in successful fruit-bearing of Mr Hall's trees but the actual causes remain unknown. Causes may include inexperience of growers, natural misfortune in particular years, inappropriate planting decisions, inappropriate management practices, or unfamiliarity with prevailing local conditions. In these circumstances, the nature of the activity is not the only possible reason for the failure of the olive growing activity to

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satisfy the assessable income test or any other of the tests in any of the income years covered by the ruling in terms of section 35-55(1)(b)(i).

Decision

52. The decision under review is affirmed.


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