• The impact of this case on ATO policy is discussed in Decision Impact Statement: Bentivoglio v Commissioner of Taxation (Published 26 November 2014).

BENTIVOGLIO v FC of T

Members:
SE Frost DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2014] AATA 620

Decision date: 2 September 2014

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S E Frost (Deputy President)

INTRODUCTION AND BRIEF BACKGROUND

1. Peter Bentivoglio, the taxpayer, is a medical practitioner. For the last 15 years or so he has also carried on an olive growing and olive oil production business in Rylstone, near Mudgee.

2. For the 2010 to 2014 income years inclusive (the relevant years), the taxpayer applied to the Commissioner for relief from the "non-commercial loss" provisions in the income tax law. Those provisions prevent the taxpayer from deducting his olive oil business losses from his other assessable income. In practical terms, unless he is granted relief, he has to wait until the olive oil business starts to generate profits before he can claim those losses.

3. The Commissioner refused the taxpayer's application for relief. His objection against the refusal was disallowed, and he has now applied to the Tribunal for review of the objection decision.

4. The essential issue before the Tribunal is whether the Commissioner's decision not to allow the taxpayer immediate access to the losses he incurred in the relevant years, is the correct or preferable decision.

5. I have decided that the taxpayer should be granted relief from the non-commercial loss provisions for the 2010 to 2013 income years, but not for the 2014 income year. My reasons follow.

RELEVANT LEGISLATION

6. There are two broad bodies of legislation relevant to this review. The first is the legislation relating to non-commercial losses. The second is the legislation relating to private rulings under the income tax law.

Legislation relating to non-commercial losses

7. The non-commercial loss provisions are found in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997). The object of the Division is said to be "to improve the integrity of the taxation system": s 35-5(1). The Division sets out to do this by, relevantly, "preventing losses from non-commercial activities that are carried on as businesses by individuals (alone or in partnership) being offset against other assessable income" (s 35-5(1)(a)) unless certain exceptions apply.

8. Central to this case are s 35-10(1) and (2), and s 35-55.

9. Sections 35-10(1) and (2) provide as follows (notes omitted):

• 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 (whether or not some other entity is a member of the partnership), unless:
  • (a) you satisfy subsection (2E) for that year, and one of the tests set out in any of the following provisions is satisfied for the business activity for that year:
    • (i) section 35-30 (assessable income test);
    • (ii) section 35-35 (profits test);
    • (iii) section 35-40 (real property test);
    • (iv) section 35-45 (other assets test); 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.

  Rules

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  ATC 6472

• (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.

10. Section 35-55 reads relevantly as follows:

• 35-55 Commissioner's discretion
• (1) The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a *business activity for one or more income years (the excluded years ) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:
  • (a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

    Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

  • (b) for an applicant who carries on the business activity who satisfies subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:
    • (i) because of its nature, it has not 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 subsections 35-10(2) and (2C)); or (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 subsections 35-10(2) and (2C)); or
  • (c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:
    • (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; 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 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)).

    Note: Paragraphs (b) and (c) are 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.

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• (2) …
• (3) An application for a decision by the Commissioner under this section must be made in the *approved form.

11. The effect of those provisions, in the taxpayer's case, is that the rule in s 35-10(2) applies (in other words, losses cannot be claimed in the income year in which they are incurred) unless the Commissioner exercises the discretion in s 35-55. That discretion can only be exercised "on application" by the taxpayer: s 35-55(1). Section 35-55(3) says that the application must be made in the "approved form".

12. The form that has been "approved" for the purposes of s 35-55 is a form called "Application for a private ruling on the exercise of the Commissioner's discretion for non-commercial business losses". That means that the Commissioner's decision not to exercise his discretion in the taxpayer's favour is a "private ruling".

Legislation relating to private rulings

13. The provisions relating to private rulings are found in Division 359 in Schedule 1 to the Taxation Administration Act 1953 (TAA).

14. Section 359-5 provides that a private ruling is "a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to [a taxpayer] in relation to a specified scheme". A private ruling must, among other things, specify "the relevant scheme and the relevant provision to which it relates": s 359-20(2).

15. A person who is dissatisfied with a private ruling may object against it under Part IVC of the TAA: s 359-60(1) in Schedule 1. The ruling is taken for the purposes of Part IVC to be a taxation decision: s 359-60(2) in Schedule 1.

16. Section 14ZZK(b)(ii) of the TAA provides that the taxpayer has the burden of proving that the private ruling "should have been made differently".

17. The ruling (which is the expression of the Commissioner's opinion) is based on the scheme as identified by the Commissioner. The Tribunal's review of the objection decision must also be based on the scheme as identified by the Commissioner; the Tribunal is not empowered to redefine the scheme. But it should be noted that in identifying the scheme, the Commissioner does not examine whether the so-called "facts" set out in the scheme are accurate or not. Instead, the Commissioner takes the background information provided to him by the taxpayer, formulates from that information a "scheme", and then provides his opinion on how the law applies to that scheme. If the facts underpinning the scheme are inaccurate, or if the scheme is implemented by the taxpayer in a way that is materially different from the way described in the ruling, then the ruling is of no practical use to the taxpayer. These broad concepts have been explained in earlier cases: see
Commissioner of Taxation v McMahon [1997] FCA 1087; (1997) 79 FCR 127 (McMahon's case) at 132-134, 140-141 and 149-150;
Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508 at [13], [15] and [16]; and
Re Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Commissioner of Taxation [2013] AATA 99 at [4]-[8].

THE PRIVATE RULING

18. This is the entire text of the "Notice of private ruling" dated 6 August 2012:

Notice of private ruling

This ruling applies to:

Client name

PETER BENTIVOGLIO ABN […]

Question

Will the Commissioner exercise the discretion in section 35-55(1) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2013-14 financial years?

Answer No

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 1997

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Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• • The application for private ruling received 21 May 2012
• • Further information received 23 June, 13 July, 20 July and 26 July 2012

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

You carry on an olive growing business, Bentivoglio Olives. The business is primarily concerned with the production of olive oil. The business also carries out olive oil processing for other growers.

You commenced business on 1 July 1997 with 6,000 olive trees. A further 2,000 trees were planted bringing the total to 8,000 trees over 125 acres by 2001.

The business is located between Mudgee and Rylstone New South Wales.

You employ 3 full time staff and an additional 10 casual staff at harvest.

You harvest, press and bottle your own produce for sale within Australia and export worldwide.

The processing facility, Rylstone Olive Press, is housed separately on an adjacent lot covering 1,100 square metres.

In the 2011-12 financial year you had your best harvest since commencement, harvesting 61.5 tonnes of olives, producing 5,400L of extra virgin olive oil.

You expect to make a profit in the 2014-15 financial year.

You sell through local boutique delis and some restaurants rather than supermarkets.

In 2000 you bought the first continuous olive oil processor.

In 2002 you built Rylstone Olive Press and installed a one ton hour continuous olive oil extraction plant. This facility houses the laboratory and storage and bottling facility. You run olive harvest workshops for growers from this site.

The processing facility has a cellar door sales area open Monday-Friday and conference area is available for conference and workshops for 120 persons. The storage area has the capacity to store 60,000 litres of olive oil.

The facility is HACCP certified, organically certified for olive oil processing under Australian Certified Organic, Japan's MAPP Organic certification and USDA FDA Certification.

Varieties of olive include; Italian Frantoio, Correggiola, Leccino Coratina and Pendolino; Spanish Picual and Manzanillo and Middle Eastern Barnea.

The trees are on supplementary irrigation, as your area in the Central Tablelands of New South Wales is known for its consistent winter rainfall.

You mechanically harvest your olives during April and May each year.

You recently received international recognition being awarded 'Gran Mention Diplomas' for the categories of fruity light harvest 2011, fruity medium harvest 2011 and extra virgin olive oils with the best chemical composition from southern hemisphere 2011 at the Armonia International Extra Virgin Olive Oil Agency Competition in Italy.

You won silver and bronze medals in Australia in 2003 for your Barnea, Leccino and Correggiola olive varieties and have won numerous gold, bronze and silver medals between 2004 and 2011.

You have provided the following financial information:

[See the Schedule attached to these reasons]

You have recently signed a contract with Jamie Oliver Kitchens and you expect sales forecasts to be understated.

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A bushfire in the grove in January 2009 destroyed nearly 500 trees in the eastern paddock.

In November 2009 and January 2010 spot fires from lightning strikes in November 2009 and January 2010 broke out in the olive grove damaging trees.

The Mudgee-Meriwa region in which your farm is situated was drought declared and experienced 'exceptional circumstances' for the 2005-06 to 2008-09 financial years.

You submit that Bentivoglio Olives was plagued by the Olive Lace bug from 2000 onwards.

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)(a)

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

OBSERVATIONS ON THE PRIVATE RULING

19. Given the significance of the "scheme" both to the ruling and to the Tribunal's review of the objection decision, it is desirable that the scheme be identified clearly and with precision in the private ruling made by the Commissioner. Unfortunately that did not happen in this case.

20. The "scheme" was identified in the ruling under the heading "Relevant facts and circumstances". I will refer to that section of the ruling as the "Scheme Outline", just as the taxpayer's counsel did. For convenience I repeat the second paragraph of the Scheme Outline (emphasis added):

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• • The application for private ruling received 21 May 2012
• • Further information received 23 June, 13 July, 20 July and 26 July 2012

21. Expressed that way, the scheme is not confined to the description that followed. Instead, it includes the content of the documents and information identified in the two bullet points (the "Scheme Documents"), since they are expressly stated to "form part of" the description of the scheme. The Commissioner ultimately, but perhaps somewhat grudgingly, accepted that was the case^[1] Transcript, 93.10-17 .

22. What that means is that the scheme comprises:

• • everything specified by the Commissioner under the heading "Relevant facts and circumstances": see [18] above;
• • the entirety of the application for private ruling (comprising the 199 pages of material at T3-10 to T3-208 of the T-documents);
• • the material at T4-209 to T4-219 (dated 25 June 2012; the reference in the ruling to "23 June 2012" must be regarded as an error);
• • the email at T5-222 dated 13 July 2012, referring to an attached spreadsheet outlining historical yields for Bentivoglio Olives;
• • that spreadsheet, which is at T11-304 and T11-305;
• • the email at T5-221 dated 20 July 2012, referring to an attached price list for Bentivoglio Olives;
• • that price list, which is at T10-302 and T10-303;
• • the email at T5-220 dated 26 July 2012, referring to an attached "Attachment K - amended";
• • the amended Attachment K at T5-226;
• • the email at T12-306, also dated 26 July 2012, and providing answers to questions asked earlier by one of the Commissioner's officers.

23. To say that a scheme of that breadth is unwieldy is surely to state the obvious. But there are even aspects of the Scheme Outline that are unsatisfactory. Bearing in mind that in the context of a private ruling, the scheme is "but a complex of assumed or identified facts"

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(
McMahon's case at 132), and that the Commissioner in identifying the scheme does not engage in any fact-finding, it is not helpful for the Commissioner to include in the scheme an assumed or identified fact expressed as "You submit that Bentivoglio Olives was plagued by the Olive Lace bug from 2000 onwards". If a reference to the issue of the olive lace bug is to be included in the scheme, it should be included as a positive statement: "Bentivoglio Olives was plagued by the Olive Lace bug from 2000 onwards". If that is not an accurate statement, then the taxpayer runs the risk of losing the protection of any favourable ruling.

24. Nor is it helpful that the Schedule of financial information included by the Commissioner in the Scheme Outline does not accurately reflect the figures provided on the taxpayer's behalf in the ruling application. Some of the figures provided by the taxpayer are omitted from the Schedule; others have been changed. As a result the "Profit/Loss" does not equal "Total Income" less "Total Expenses". One of the consequences is that there is one part of the scheme (the figures as provided by the taxpayer) that directly conflicts with another part of it (the figures included by the Commissioner in the Scheme Outline).

25. This scheme, in its entirety - incorporating both the Scheme Outline and the material referred to in [22] above, which the taxpayer's counsel labelled the "Scheme Documents" - comprises over 200 pages of content. There are some inconsistencies in that body of material. Those inconsistencies could have been removed if, in identifying the scheme, the Commissioner had meticulously defined a consistent and comprehensive factual substratum as the scheme on which the ruling was based. The taxpayer could then have looked at the scheme and the ruling, considered how close to reality the identified scheme was, and made an informed decision as to whether to rely on the ruling or not. If the scheme did not reflect the scenario the taxpayer wanted addressed, then an option would have been to seek a ruling on a differently defined scheme. Unfortunately, it seems to me that the Commissioner's officers took a regrettably inattentive approach to the formulation of the scheme. That has made the review task more difficult than it needs to be.

26. Against that background, it is difficult to accept the Commissioner's complaints about the taxpayer's approach to the case, namely:

• • That he was attempting, impermissibly, to redefine the scheme^[2] Outline of Further Submissions for the Respondent, at [1] ;
• • That he was "cherry picking" information from the Scheme Documents to support a calculation of tax profit^[3] Outline of Further Submissions for the Respondent, at [11]; the expression “tax profit” is used as shorthand to signify an excess of assessable income over deductions ;
• • That he was trying to introduce new facts other than those on which the ruling was based^[4] Outline of Further Submissions for the Respondent, at [12] ; and
• • That "at the time of the ruling application there was no assertion by the applicant that a tax profit would otherwise have been made but for the special circumstances, or the amount of the tax profit"^[5] Ibid .

27. The first complaint is not justified. The taxpayer's counsel was scrupulously careful in identifying any Source Documents on which she based any submissions.

28. As to the second complaint, I accept that there was an element of cherry picking. It could hardly be otherwise in a scheme - formulated, one must recall, by the Commissioner - of over 200 pages.

29. I reject the third complaint as without justification. I accept that the taxpayer is not entitled to introduce any new facts, but in my view he did not try to do that.

30. As to the fourth complaint, that is a direct consequence of the fact that the Commissioner's "approved form" asks no questions about tax profit. It is disappointing that a taxpayer should be criticised on that basis.

THE ISSUE DEFINED

31. The issue is whether, by reference to the scheme as identified by the Commissioner, the discretion in s 35-55 should be exercised in the taxpayer's favour. The question needs to be considered for each of the income years in issue: 2010, 2011, 2012, 2013 and 2014.

32. Because of the taxpayer's particular circumstances, the exercise of the discretion in s 35-55 is the only way the taxpayer can be relieved from the non-commercial loss provisions. That is because in each of the relevant years his taxable income (disregarding

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any possible losses from his olive oil business) exceeded $250,000. As a result the taxpayer did not satisfy s 35-10(2E) for any of the relevant years. That means that he cannot rely on s 35-10(1)(a) for relief; the only way he can be relieved from the rule in s 35-10(2) is through s 35-10(1)(b) and the discretion in s 35-55.

33. The taxpayer's failure to satisfy s 35-10(2E) is also relevant for the purposes of s 35-55, although in a slightly different way. Paragraphs (b) and (c) of s 35-55(1) respectively are predicated on the question whether a taxpayer does, or does not, satisfy s 35-10(2E) "for the most recent income year ending before the application is made". In the taxpayer's case, that is the 2011 year, since the "application" was made on 17 May 2012 (T3-20). For that year, the taxpayer did not satisfy s 35-10(2E), and therefore paragraph (b) does not apply in respect of any of the relevant years, but paragraph (c) potentially does.

34. In the language of the relevant legislation, the question is whether the Tribunal, standing in the shoes of the Commissioner, is satisfied that it would be unreasonable to apply the rule in s 35-10(2) in respect of any of the relevant years, for one or both of the following reasons:

• (i) because the business activity was affected in the particular year by special circumstances outside the control of the operator of the business activity, including drought, flood, bushfire or some other natural disaster (s 35-55(1)(a)); or
• (ii) because the business activity has started to be carried on and, for the particular year:
  • (a) because of its nature, it has not produced assessable income greater than the deductions attributable to it; and
  • (b) 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 produce assessable income for an income year greater than the deductions attributable to it for that year (s 35-55(1)(c)).

35. The "business activity" as described in the Scheme Outline was an aggregation of the activities of olive growing and olive oil production (including production for other growers). The taxpayer does not cavil with the aggregation of the activities in that way^[6] Applicant's Outline of Submissions [43] .

THE 2009 AMENDMENTS TO DIVISION 35

36. Division 35 was amended in 2009 by the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 (No. 133, 2009). That is the Act that introduced the "income requirement" in s 35-10(2E).

37. Prior to the amendment, relief from the rule in s 35-10(2) was available to any taxpayer who met one of the objective tests referred to in s 35-10(1)(a). After the amendment, a "high-income" taxpayer - in other words, a taxpayer with taxable income over $250,000 - meeting one of the objective tests would not get relief under s 35-10(1)(a) but would have to rely on the exercise of the Commissioner's discretion under s 35-55.

38. Section 35-55 was also amended at the same time, by splitting the former paragraph (1)(b) into two separate provisions - one covering the taxpayer who does, and one covering the taxpayer who does not, satisfy the income requirement in the most recent income year. But the 2009 amendment made no change to paragraph (1)(a) or to the note that follows it. As a result, the note still says that the paragraph:

… is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

39. The "tests" referred to in the note are obviously the objective tests referred to in s 35-10(1)(a).

40. The note suggests that it is sufficient to attract the exercise of the discretion in s 35-55(1)(a) that a taxpayer would have satisfied one of those objective tests if the "special circumstances" had not prevented that outcome. Bearing in mind that a taxpayer who does not satisfy the "income requirement" cannot obtain the benefit of s 35-10(1)(a) by satisfying one of the objective tests, an obvious question is whether that same taxpayer can still get the benefit of s 35-55(1)(a) if one of the objective tests would have been satisfied but for the special circumstances.

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THE COMMISSIONER'S POSITION

41. The Commissioner has issued a public ruling, TR 2007/6, addressing the way in which the discretion in s 35-55 will be exercised. In relation to s 35-55(1)(a), paragraph 13A of the ruling explains:

For those individuals who do not satisfy the income requirement in subsection 35-10(2E) special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year(s) in question where:

• • but for the special circumstances, the business activity would have made a tax profit; and
• • the activity passes at least one of the four tests or, but for the special circumstances, would have passed at least one of the four tests.

42. This is a type of formulation commonly adopted by the Commissioner in public rulings. Read literally, the paragraph does not prescribe an exhaustive test. Rather, it explains that satisfying both bullet points is one example of a scenario that is sufficient (but not necessary) to attract the favourable exercise of the discretion. However, in practice, the paragraph seems to be administered on the basis that the discretion will be exercised only if both bullet points are satisfied. Indeed, paragraph 41D^[7] This is part of “Appendix 1” of the ruling, and is therefore not legally binding; see s 358-5(3)(b) in Schedule 1 to the TAA and the introductory words to TR 2007/6 which expressly exclude the “appendixes” from the public ruling of the ruling is in the following terms:

For individuals who do not satisfy the income requirement, the factors that must be satisfied before deciding whether to exercise the special circumstances limb of the discretion for an income year are that:

• • the business activity is affected by special circumstances such that it is unable to produce a tax profit; and
• • the business activity either satisfies at least one of the tests or is affected by special circumstances such that it is unable to satisfy any of the tests; and
• • the special circumstances affecting the business activity are outside the control of the operators of the business activity. (emphasis added)

43. It is difficult to reconcile that statement with the language of s 35-55(1)(a).

PREVIOUS CONSIDERATION OF SECTION 35-55

44. In
Re Heaney and Commissioner of Taxation (2013) 138 ALD 144; [2013] AATA 331, the Commissioner submitted at [62] that the discretion in s 35-55(1)(a) should be exercised only if both bullet points in paragraph 13A of TR 2007/6 were satisfied (see [41] above). The Commissioner took the same position here^[8] Outline of Submissions for the Respondent, at [7] .

45. In Heaney, Senior Member Fice was not persuaded that the possible satisfaction of any of the objective tests would be relevant to a taxpayer who did not satisfy the "income requirement": at [81]. I respectfully agree with the Senior Member's conclusion. It is difficult to see how the objective tests could possibly be relevant to the exercise of the discretion in favour of a "high-income" taxpayer when satisfaction of any, or even all, of the tests would not have been enough to trigger s 35-10(1)(a) in the first place.

46. The Senior Member also concluded in Heaney, at ALD page 161 [77], that the discretion in s 35-55(1)(a):

… is available to be exercised where a taxpayer does not meet the income requirement in s 35-10(2E) provided that the taxpayer is able to prove, on the balance of probabilities, that but for the special circumstances claimed, he or she would have produced assessable income greater than the deductions attributable to the business activity. (emphasis added)

47. In other words, the discretion could not be exercised in favour of a taxpayer who did not satisfy the "income requirement" unless the business activity would have generated a tax profit^[9] The parties, as well as the Tribunal, in Heaney used the expression “tax profit” in the same way as it has been used by the parties in this case, and in these reasons: as a shorthand way of signifying an excess of assessable income over deductions: see for example Heaney at [75] in the income year if the special circumstances had not occurred. That conclusion was reached after a very careful analysis of the pre- and post-2009 state of Division 35 and a detailed consideration of the objects of the Division. It is a conclusion which makes the failure to show that a tax profit would have been generated in the absence of the special circumstances a necessary disqualifier to the exercise of the discretion in s 35-55(1)(a).

48. I regret to say that I have not been able to reach the same conclusion.

49.

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In
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 84 ATR 1; 2012 ATC 20-361; [2012] HCA 55, the High Court said at ATR 11; ATC 14,336; [39]:

"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text" [
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at 46 [47]; [2009] HCA 41 [59]]. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.

50. The central question posed by the text of s 35-55(1) is whether the Commissioner (or the Tribunal on review) is satisfied that it would be unreasonable, for one of the reasons specified in paragraphs (a), (b) and (c), to apply the rule in s 35-10(2) to a business activity for a given income year. The task is therefore to consider whether one of the sets of circumstances in paragraphs (a), (b) and (c) has been established, and if so, whether, because of the existence of that set of circumstances, it would be unreasonable to apply the rule in s 35-10(2). If satisfied that it would be unreasonable to apply the rule, the decision-maker may decide that the rule does not apply - although, in context, it would seem a perverse outcome, and probably an improper exercise of the power, if the discretion were enlivened and yet not exercised in a taxpayer's favour.

51. Turning specifically to s 35-55(1)(a), there will be cases in which a finding of special circumstances outside the taxpayer's control will satisfy the Commissioner or the Tribunal that it would be unreasonable to apply the rule in s 35-10(2). There will be other cases where, despite a finding of special circumstances, the Commissioner or the Tribunal will not be satisfied that it is unreasonable to apply the rule. No doubt the requisite level of satisfaction will commonly be reached where the business activity would have generated a tax profit in the absence of the special circumstances. But it does not follow that the level of satisfaction will not, or cannot, be reached if that is not the case. That would amount to changing the test from one of unreasonableness based on special circumstances, to one of tax profit, pure and simple.

52. The Parliament could easily have legislated tax profit as the test but it chose not to. It is obviously familiar with the words that would have achieved that outcome; it used the very words - "assessable income … greater than the deductions" - in both paragraphs (b) and (c) of the same subsection. I infer that it did not use those words in paragraph (a) because that is not the test it had in mind.

53. That is not to say that the question as to whether the business activity would have generated a tax profit in the absence of the special circumstances is irrelevant. In some cases, perhaps most, it will be relevant. And it will probably be the case that the balance is more readily tipped against the exercise of the discretion where the business activity would have fallen well short of a tax profit, and in favour of the exercise where the result would have been a tax profit or an outcome on the borderline. But ultimately, as in most cases requiring the exercise of a discretion, it will be for the decision-maker to determine how significant a factor it is, and how it is to be weighed against other factors that are considered relevant.

SPECIAL CIRCUMSTANCES AS CLAIMED BY THE TAXPAYER - PARAGRAPH (A)

54. Special circumstances are circumstances that are unusual, uncommon, or out of the ordinary:
Minister of Community Services and Health v Chee Keong Thoo [1998] FCA 54;
Groth v Secretary, Department of Social Security [1995] FCA 1708; (1995) 40 ALD 541. The taxpayer claims there are several special circumstances that affected the business activity in the relevant years.

Olive lace bug

55. The first of the special circumstances on which the taxpayer relies is the impact of infestations of the olive trees by the olive lace bug.

56.

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ATC 6480

The Scheme Document at T3-89 and following, dated June 2005 and described as a report on Sustainable Pest and Disease Management in Australian Olive Production, prepared by Professor Robert Spooner-Hart, who describes himself at T3-82 as "the pre-eminent authority on olive pests and diseases in Australia", records the following "assumed facts" for the purposes of the scheme:

• • The olive industry at that time was at a relatively young stage of development^[10] T3-91 ;
• • Olive lace bug was the second most common arthropod pest^[11] T3-99 ;
• • In the 2002-2003 season, Bentivoglio Olives had 8,000 trees, 1 and 4 years old^[12] T3-111 - a statement that is inconsistent with the Scheme Outline but consistent with the Scheme Document at T3-44 ("Olive production of 8,000 trees planted in 1998 and 2001");
• • Olive lace bugs were "common" on the Bentivoglio Olives property^[13] T3-119 but they had not been observed in Queensland or anywhere else included in the report^[14] T3-113 ;
• • Data compiled for the purposes of the report "seem[ed] to confirm that lace bug, while not widespread in all olive-growing districts can cause severe damage where major infestations occur"^[15] Ibid .

57. A separate Scheme Document at T3-83, dated March 2012, records the following "assumed facts"^[16] T3-83 :

• • Olive lace bug, unlike many other olive pests, is native to Australia and its only commercial crop host is European olive;
• • At the time there were no strategies available for the effective management of olive lace bug;
• • At the time, its pest status was increasing and its geographic presence was spreading;
• • Olive lace bug infestations severely debilitate trees, causing leaf drop, branch die-back and tree death. Surviving trees may not bear fruit for several years;
• • There was a limited range of chemical control options available. The few chemicals then available were either ineffective or unacceptable in sustainable olive production. That situation was exacerbated in organic olive groves;
• • The lace bug has the capacity to threaten the viability of olive production;
• • Olive lace bug was the most important pest for which there were no effective pesticide or non-pesticide options;
• • By March 2012, Bentivoglio Olives had developed plans for the management of olive lace bug, consistent with organic production. Those efforts had not yet been successful.

58. A Business Plan prepared in November 2011 in respect of Bentivoglio Olives contained the following "assumed facts" as identified weaknesses in the SWOT analysis^[17] T3-54 :

• • 2006-07 - Olive Lace Bug infestation moved in causing severe defoliation;
• • 2007-08 - Olive Lace Bug infestation from the previous year no worthwhile harvest resulted in April 2008. Olive Lace Bug (OLB) reinfested the property;
• • 2008-09 - Drought continued and effects of the previous year's OLB infestation.

59. At objection, the taxpayer provided, among other things, a further report from Professor Spooner-Hart, dated September 2012, which included the following^[18] T8-299 :

During my research work with olive lace bug, I have frequently visited the Bentivoglio Olives grove at Rylstone, which I have used as a field trial site. During this time, I collaborated with staff to develop management plans for their olive lace bug management, consistent with organic production. Unfortunately, these efforts have not been successful to date, and the grove has recently been decimated by this pest. This situation has been exacerbated by a number of recent years of drought, which predisposes the olive trees to even more severe damage and higher lace bug populations. I have arranged to work with Bentivoglio Olives over the next few seasons in implementing management plans for olive lace bug, as part of my on-going research. The outcomes of this work will benefit not only Bentivoglio Olives but the whole Australian olive industry.

In my expert opinion, based on more than 40 years' experience in horticultural pest and disease management and more than 15

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ATC 6481

years with olive pests, it will take 3-4 years before Bentivoglio Olives will be able to produce a commercial crop from their grove, even if the management of the olive lace bug is successful.

60. This document is not a Scheme Document. However, the Commissioner, and of course the Tribunal, may consider the information contained in the document, provided the information is not such as to cause a material difference between the scheme to which the application related and the scheme to which the ruling relates: s 359-65 in Schedule 1 to the TAA.

61. The Scheme Document at T3-78, dated 14 November 2011, notes that there was:

… [a] lack of organically-approved [pest] control agents as well as limitations on the number of products with permits for olives issued by the Australian regulatory agencies. With the small size of the industry there were not the major resources that wine, cotton or other sectors invest in research to address such problems.

Consequentially, olive growers were asked to contribute to new research efforts and also had to develop individual management strategies in the absence of industry-wide solutions.

Prolonged drought and dry conditions

62. The second claimed special circumstance is drought.

63. The Scheme Outline notes that the Mudgee-Merriwa region in which the taxpayer's farm is situated was drought declared and experienced "exceptional circumstances" for the 2005-06 to 2008-09 financial years.

64. The Scheme Documents include the following at T3-16:

During [the period from July 1997 to 2001] Bentivoglio Olives suffered from numerous environmental factors, beyond their control, which hindered maturation of trees, destroyed fertility of crop, depleted crop yield and therefore prevented our client from producing optimum yields within Olive Industry benchmarks and thus not pass the profits test due to decrease[d] sales and excessive operational costs to combat the environmental forces. This was primarily due to the following 3 natural causes:

• i. Drought …
• ii. Olive Lace Bug …
• iii. Fire …

65. It is also an "assumed fact" for the purposes of the scheme that the Mudgee-Merriwa region continued to experience exceptional circumstances and was eligible for financial drought assistance "for the years ended 2005-2006 to 2008-2009"^[19] T4-209 , even though an examination of the maps at T4-217 and T4-218 and the explanation at T4-219 suggests that the region identified as "Central Mudgee-Merriwa" was not so declared in 2005-2006 and that, by 2008-2009, the entire Mudgee-Merriwa region had been classified as an "Expired or Revised EC declared [area] no longer covered by an EC declaration".

66. One of the Scheme Documents is a letter dated 15 November 2011 and written by Paul Miller, the President of Australian Olive Association Ltd^[20] T3-72/76 . The letter includes the following as "assumed facts":

The Australian Olive Industry has had its unforeseen challenges:

• • There was a drought in south eastern Australia for most of the first decade of this century. This was clearly apparent in its severe effects in New South Wales both from lack of water and extraordinary weather extremes.
• • We have estimated that this drought cost the olive industry about 200 million dollars (farm-gate bulk price) in lost production in the latter half of that decade. Its effects still resonate.

67. Another Scheme Document commencing at T3-77, a letter written on 14 November 2011 by Peter O'Clery AM, the President of Olive NSW and himself the owner of an olive grove in the Canberra area, includes the following "assumed facts"^[21] T3-78 :

YIELD

Overall expectations were that olive groves planned in the 1990s would yield commercial results within a 5 year time frame. A review of MIS prospectuses in the public arena shows that they were clearly extremely optimistic in this regard. However, even those of us who took a more

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ATC 6482

conservative view could not possibly have foreseen the impact of the severe drought. In our case, instead of reaching commercial yields for our irrigated grove within 8 years, our trees planted in 2000 did not reach commercial production levels around 30kg per tree until 2011 - after the drought broke.

This was the general experience across NSW and most other States.

Clearly, the drought has had a sustained adverse impact on all groves necessitating continued financial support for groves well beyond original expectations. …

68. Returning to the Business Plan prepared in November 2011 in relation to the taxpayer's business, the following "assumed facts" were identified as weaknesses in the SWOT analysis, under the heading "Climate"^[22] T3-53/54 :

• • 2001-02 - The season had been very dry as this was the start of the drought which lasted for the next ten years for all growers
• • 2002-03 - Hot dry winds were experienced through the flowering period in November, which cooked the flowers at their most vulnerable stage resulting in a negligible crop in April 2003
• • 2003-04 - Drought continued
• • 2004-05 - Drought still continued
• • …
• • 2006-07 - An extremely dry winter, spring and summer was experienced. A semi-reasonable crop set in the spring however this shattered off throughout the summer with the extreme heat and dry that followed. …
• • 2007-08 - Drought continued to hamper the effort to get the grove to a commercial [level] …
• • 2008-09 - Drought continued …
• • 2009-10 - An extremely dry and hot weather event was experienced during the first two weeks of November 09 (40 to 44 degrees with a howling westerly wind). This coincided with what was looking like a very good flowering, the fruit buds were cooked instantaneously hence no crop was harvested in 2010.
• • 2010-11 - 3^rd of January 2011 we had a major hailstorm which reduced the crop from well in excess of 40 tonnes to approximately 4 tonnes within a period of 3 minutes.

Fire

69. The third claimed special circumstance is fire.

70. As explained in the Scheme Document at T3-54, it is an assumed fact that a lightning strike in February 2007 set off a grass fire which burnt many trees. Some produced new shoots but the fire greatly delayed their maturing.

Extraordinary challenges facing the olive oil industry

71. The fourth claimed special circumstance is the "extraordinary challenges" facing the industry.

72. Assumed facts in this context include (as set out in the Scheme Document at T3-72/73, the letter dated 15 November 2011 written by Paul Miller, the President of Australian Olive Association Ltd^[23] See [66] of these reasons ):

• • The EU producers have inundated markets such as Australia and the USA with low grade products labelled as extra virgin olive oil (what they wouldn't sell at home) negatively impacting olive oil pricing in Australia.
• • The GFC impact in southern Europe continues to exacerbate this situation with producers - unable to fund storage and inventory - quitting product at historically low prices.
• • The Australian retail duopoly has seen fit to use olive oil as a 'loss leader' seriously devaluing this food for short term gain.
• • The high Australian dollar has adversely impacted export opportunities.
• • Increased industry assistance and protection in Europe has further extended the impact of low pricing on world markets.

73. Further assumed facts provided in Mr O'Clery's letter dated 14 November 2011 include^[24] T3-79/80 :

PRICE

The price of olive oil is a major issue for Australian producers as contrary to forecasts of the 1990s, while demand has improved, global prices have fallen rather than increased. Unlike expectations at that

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time, the International Olive Oil Council has not been effective in guaranteeing the standard of oils offered in the international market, with the consequence that the 'new world' has seen a flood of mislabelled/arguably fraudulent oils entering the market, especially via the big supermarket chains and hospitality industry suppliers.

Recent figures indicates that production costs in Spain (with less regulation than in Australia) are running at about $3.90 per litre with a euro-subsidy of $1.00 bringing the average bulk cost back to $2.90. With Spain and Greece anxious to achieve foreign currency, many large purchases from these countries be (sic) aptly described as 'profitless-volume' sales.

Australian production costs per litre for large groves, with higher inputs but greater efficiencies, would be on a par with the Spanish costs but without the euro-subsidy. The average cost per litre, however, for smaller groves is higher as they do not have the same economies of scale especially in harvesting and processing, with estimated production costs in the region of $5.30 per litre for say a 2,000 to 3,000 tree grove.

These higher figures will fall marginally over time as trees achieve higher yields and innovation delivers higher efficiencies in -

• • Pruning and grove management
• • Irrigation systems
• • Harvesting equipment
• • Processing
• • Storage & distribution

However, the industry will continue to struggle unless the initiatives introduced to curb the importation and sale of cheap sub-standard products (AOA Code of Practice, Australian Standard AS5264-2011, the alliance of 'new world' producers placing the International Olive Council under pressure, as well as actions nationally by ACCC and Consumer Groups to clean out fraudulent practices) and the elimination of the euro-subsidies due to occur in 2014, are substantially progressed.

All these coming together should certainly see not only greater efficiencies, but the realisation of higher prices locally and internationally for olive oils. On the bright side already is the high level of promotion and acceptance of the concept of 'freshness' of local products, as well as positive responses from some key retailers and regulatory authorities.

Other circumstances

74. The following are "assumed facts" for the purposes of the ruling:

• • Spot fires from lightning strikes in Nov 2009 and again in January 2010 broke out in Rylstone and Bentivoglio Olives groves damaging trees. Crops were further damaged due to smoke from burning fires in the Mudgee region during this period .^[25] T3-16 ;
• • The olive is a biennial bearing fruit and the flowers are wind pollinated. There are many factors which contribute to lack of crop^[26] T3-22 ;
• • Smoke inhibits pollination^[27] Ibid .

75. The taxpayer's wife was diagnosed with a serious medical condition in late 2009. She underwent major surgery in May 2010 and by November 2011 was "slowly recovering". She has project management skills and an agribusiness education. Her "involvement in industry education and development have improved the high quality of olive oil processing and production at Bentivoglio Olives"^[28] T3-34 . She is identified as a "Strength" in the SWOT analysis included in the November 2011 Business Plan, and has extensive experience as an oil maker and blender, a show judge, and a director and board member of regional, state and national olive associations^[29] T3-43/44 .

76. Her illness was identified as a "Weakness" in the November 2011 Business Plan^[30] T3-53 . In that document it was noted that she "expects to be back working at 100% by 2013"^[31] Ibid .

CONSIDERATION OF THE "SPECIAL CIRCUMSTANCES" CLAIMS

77. Even accepting that special circumstances are circumstances that are unusual, uncommon, or out of the ordinary, there is still the question: by reference to what? Is it by reference to the circumstances of other businesses generally, other businesses in different locations, other businesses carrying on

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similar activities? Or is it by reference to the activities of this particular business, in years other than the years in question? The answer may vary, depending on the particular circumstances being considered.

78. A fire that sweeps through an entire region, damaging several adjacent properties, is an occurrence that is unusual, uncommon or out of the ordinary for each of the affected properties, even though it is experienced more or less equally on all of them. Drought can still be a special circumstance even though it occurs reasonably commonly in Australia, and then often for extended periods. It is no less "special" for spanning multiple income years or for impacting multiple entities in a similar way - and it is specifically included in s 35-55(1)(a) as a potential "special circumstance".

Olive lace bug

79. At objection, the Commissioner accepted the olive lace bug infestations as a special circumstance^[32] T2-4 but by the time of the hearing had resiled from that position. Nevertheless, he acknowledged that "[w]hether the lace bug constituted a special circumstance is a matter of impression and degree having regard to the information provided by the applicant …"^[33] Outline of Further Submissions for the Respondent, at [4] .

80. In his written submissions the Commissioner said^[34] Outline of Submissions for the Respondent, at [17] :

The prevalence of pestilence and the study of means to manage the problem would not constitute an unusual event in the context of primary industry so as to be a 'special circumstance'.

81. If that is meant to suggest that everyone on the land will have to deal with insect pests some day, so it can never be a special circumstance for anyone, I reject it. That would be to take the entirety of primary industry activity in Australia as the reference point for the consideration of special circumstances - a brush that is plainly too broad.

82. The point the taxpayer makes is that, for his particular business activity, a lace bug infestation is a special circumstance because, although it might be experienced by other participants - even by many other participants - in the olive industry, his organic certification restricted the way he could respond to the problem^[35] See [57] of these reasons and T3-83 . I agree that lace bug infestation is a special circumstance.

83. It is an assumed fact that lace bugs severely debilitate trees, causing leaf drop, branch die-back and tree death^[36] T3-83 . It is an assumed fact that surviving trees may not bear fruit for several years^[37] Ibid . It is an assumed fact that the effects of lace bug infestation were being felt as late as 2008-09^[38] T3-54 . It is also the case that, in Professor Spooner-Hart's expert opinion, and because of the effect of olive lace bug infestations prior to his report in September 2012, Bentivoglio Olives will not be able to produce a commercial crop from their grove until either 2015 or 2016, even if the management of the olive lace bug is successful^[39] T8-299; see also [59] of these reasons . It seems clear, on the basis of that material, that olive lace bug has "affected" the business activity in each of the years under consideration here.

84. I note, however, that there is material pointing the other way. For example, it is stated in the scheme that 2009-10 was "looking like a very good flowering"^[40] T3-54 until the onset of the "extremely dry and hot weather event"^[41] Ibid and that, but for a major hail storm, the crop for 2010-11 would have been "well in excess of 40 tonnes"^[42] Ibid . That apparently conflicting factual material needs to be taken into account when I come to consider whether I am satisfied that it would be unreasonable to apply the rule in s 35-10(2).

Prolonged drought and dry conditions; other weather events

85. The Commissioner accepts the following events as constituting special circumstances that affected the business activity for the excluded income years and were outside the taxpayer's control^[43] Outline of Submissions for the Respondent at [15] :

• • The drought experienced in the 2007 and 2009 years;
• • The extraordinarily hot weather event experienced in November 2009;
• • Spot fires from lightning strikes in February 2007 and November 2009 and resulting smoke that inhibited pollination;
• • The hailstorm in January 2011.

Illness of the taxpayer's wife

86. The Commissioner submits that illness is not a special circumstance unless the person is a

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"key" person such that the illness affected the operation of the business^[44] Outline of Submissions for the Respondent at [19] . That submission implicitly accepts that the question is one of fact and degree.

87. The assumed facts from the scheme, as summarised in [75] of these reasons, show that the taxpayer's wife is a highly qualified member of the team and an experienced oil maker and blender. I conclude that her illness, which was of course outside the taxpayer's control, is a special circumstance that affected the business activity in the 2010 income year (when the diagnosis of her illness was made and she underwent surgery) and the 2011 and 2012 income years (when she was recuperating). It is possible that there was some residual impact during the 2013 income year but, on the assumed facts, it was expected that she would be fully recovered at least by the 2014 income year^[45] T3-53; see also [76] of these reasons .

Extraordinary challenges facing the olive oil industry

88. The "extraordinary challenges" noted in [72] and [73] of these reasons, while outside the taxpayer's control, are not in my view "special circumstances" because they are not unusual, uncommon, or out of the ordinary. They are examples of the standard types of challenges that are faced, on an ongoing basis, by all participants in the olive oil industry and, for that matter, many other industries that seek to compete with imported product. Nor did they affect the business activity during the relevant years. As the Commissioner correctly submitted^[46] Outline of Submissions for the Respondent at [21] :

… the events have not 'affected' the business activity per se as the activity of carrying on the business is not impacted. The olives are still grown and processed for sale in the normal course. It is simply that the olives cannot be sold for the requisite price to return a profit.

Tax profit

89. Although I have concluded that, on the proper construction of s 35-55(1)(a), the failure to show that a tax profit would have been generated in the absence of the special circumstances is not a necessary disqualifier to the exercise of the discretion in s 35-55(1)(a), it is nevertheless a relevant consideration.

90. At Appendix A to the Applicant's Outline of Submissions there is a calculation, based on material included in the Scheme Outline and the Scheme Documents, that seeks to show what would have been the financial outcome in the absence of special circumstances^[47] I have already referred, in [26] of these reasons, to the Commissioner's complaint about the taxpayer's attempt to rely, now, on a notional calculation of tax profit when no such calculation was provided at the time of making the ruling application. However, as noted in [27] to [30], the complaint is without justification. . The critical components of the calculation are:

• (a) the weight of olives produced by trees which, by the 2010 income year (the first of the excluded years), are all at least 9 years old - 40 kg per tree (but only every second year);
• (b) the yield from that quantum of fruit - 20.5%;
• (c) the standard conversion to oil - divide yield by 0.91;
• (d) the price per litre of oil - estimated at $20.

91. The components at paragraphs (a), (b) and (c) are sourced to the Scheme Document at T3-200, "Economics of NSW olive production" produced by the NSW Department of Primary Industries, and specifically the table at T3-201 (paragraph (a)), the estimate of oil yields at T3-202 (paragraph (b) - the taxpayer takes the midpoint) and the arithmetic formula at T3-204 (paragraph (c)).

92. The most contentious of the components in Appendix A is the notional price of $20 per litre of oil, paragraph (d). In my view, that estimate is entirely reasonable (although I note that the taxpayer's calculation of so-called "average" prices in Note 1 to Appendix A would have been more informative if it had been weighted to take account of volumes sold). In any event, the price lists at T10-302 and 303 show that, while the selling price of oil varies depending on the category of customer, the cellar door price for organic oil was $40 per litre during the period 2008 to 2010 and $50 per litre during 2011 and 2012, and the "Retailer direct" price was $19.46 per litre during 2008 to 2010 and $22.26 per litre in 2011 and 2012.

93. The calculation in Appendix A, of course, is only an approximation of what would have been the outcome if the business had not been affected by special circumstances. The calculation assumes, in effect, that the development of the olive groves had not been compromised by the special circumstances (of

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which the olive lace bug and the extreme weather events had the most significant impact). For each of the excluded years, the calculated profit ranges from a low of $127,471 in 2010 to a high of $463,631 in 2013. It is reasonable to conclude that in each of the excluded years there would have been a comfortable tax profit but for the special circumstances.

IS IT "UNREASONABLE" TO APPLY THE RULE IN SECTION 35-10(2)?

94. Having regard to the impact of the special circumstances on the taxpayer's business activity in the excluded years, and to the financial outcomes that could have been expected had those special circumstances not occurred, I am satisfied that it would be unreasonable to apply the rule in s 35-10(2) in each of the 2010, 2011, 2012 and 2013 income years. I do not include the 2014 income year, and I will explain why.

95. The table at T3-201, taken together with the assumed fact at T3-54 that the 2010-2011 crop would have been "well in excess of 40 tonnes" if there had been no hail storm in January 2011, confirms that the olive lace bug infestations and the other special circumstances have put the business four years behind where it should be. This is on the basis that an actual crop of 40 tonnes, compared to a notional crop (special circumstances aside) of 180 tonnes, is broadly equivalent to the harvest ratio noted in the table at T3-201 between 5-year-old trees and 9-year-old trees (10-15 kg per tree for the former; 25-50 kg for the latter). Given that the latest year in which the direct physical effects of olive lace bug infestation were being experienced is 2008-09^[48] T3-54 , I conclude that any losses incurred in the 2014 year cannot be attributed to the ongoing impact of special circumstances. It is therefore not unreasonable to apply the rule in s 35-10(2) in respect of the 2014 year.

"TAX PROFIT" WITHIN A COMMERCIALLY VIABLE PERIOD - PARAGRAPH (C)

96. Since I have concluded that the discretion in s 35-55(1) should be exercised in reliance on paragraph (a), it is unnecessary for me to consider the possible exercise of the same discretion on the alternative basis of paragraph (c). However, for completeness, it is appropriate that I set out my reasoning in case there should be some error in my conclusion on paragraph (a).

97. The Scheme Outline and the Scheme Documents provide little information on what should be regarded as "a period that is commercially viable for the industry concerned".

98. The taxpayer points to the Scheme Document at T3-200, a document produced by the NSW Department of Primary Industries (DPI) and entitled "Economics of NSW olive production", which says among other things^[49] T3-201 :

While limited fruit production will commence at 2-3 years, olive trees can commence production of good commercial crops at 4-5 years, and full commercial production begins at 9-10 years. Yields up to year 7 can be highly variable.

99. The taxpayer then submits^[50] Applicant's Outline of Submissions at [187] :

Having regard to the above "lead times" for full commercial production, i.e. 9-10 years, if the 6000 trees were planted in November 1998 (and the year of planting is not counted^[51] As suggested in the DPI document ), then prima facie, a lead time period of 9-10 years would ordinarily have been reached in the 2008 or 2009 income years, being just prior to the excluded years in question, but of course this does not take into account the various "special circumstances" that have been outlined at length in this paper, principally from the impact of the severe drought combined with and compounded by the severe infestations of lace bug and which circumstances occurred during the "lead time" and plainly extended it for Dr Bentivoglio.

100. That submission cannot be accepted. It amounts to an attempt to lengthen the "commercial viability" period for the industry as a consequence of circumstances that are said to be "special" for this individual taxpayer.

101. It seems to me that even on the most favourable view of the information contained in the Scheme Documents, and in particular that which is referred to in [93] of these reasons (putting the upper limit of a commercially viable period at ten years), the taxpayer must fail subparagraph (ii) of s 35-55(1)(c) because it

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is not the case that there is an objective expectation that, within that period, the taxpayer's business activity will produce a "tax profit". In fact, it is now known that it did not do so.

102. It follows that there is no scope to exercise the discretion in s 35-55(1) in reliance on the circumstances in paragraph (c).

DECISION

103. The objection decision as it relates to the 2010, 2011, 2012 and 2013 income years is set aside, and instead the objection is allowed in full.

104. The objection decision as it relates to the 2014 income year is affirmed.

RECOMMENDATIONS

105. I make the following recommendations to the Commissioner as a result of issues raised during these proceedings:

• (a) Consider the use of an alternative "approved form" for applications of this nature, to take them out of the "private ruling" regime;
• (b) Ensure, as far as possible, that any alternative "approved form":
  • (i) asks applicants to provide all the information the Commissioner considers necessary for a proper consideration of the application;
  • (ii) takes into account the legislative amendments enacted in 2009;
• (c) Provide additional guidance to officers in the formulation of "schemes" for the purpose of private rulings.

SCHEDULE

SCHEDULE

Income	2009-10 Actual $	2010-11 Actual $	2011-12 Forecast $	2012-13 Forecast $	2013-14 Forecast $	2014-15 Forecast $
Processing Tolls - Other Growers	16,949	69,564	16,000	40,000	40,000	40,000
Domestic Oil Sales	69,082	37,343	108,000	108,079	105,077	269,011
Export Oil Sales				116,640	180,000	360,000
Bottling	11,088	8,576	10,125	10,125	10,125	10,125
Total Income	97,119	115,484	134,125	274,844	335,202	679,136
Expenses
Accounting			4,500	4,500	4,500	4,500
Advertising	202,854	183,889	10,415	10,415	10,415	10,415
Depreciation		11,589	11,009	10,459	9,936	9,439
Event Fees
Freight	8,826	9,663	9,600	9,600	9,600	9,600
Fuel	13,477	10,579	10,737	10,737	10,737	10,737
Insurance	13,859	13,000	13,000	13,000	13,000	13,000
Interest	70,817	56,654	70,817	31,000	15,000	ATC 6488
Lease Charges	41,260	10,658	16,644
Printing and Stationery			2,900	2,900	2,900	2,900
Production Manager Rental	9,533	10,487		10,800	10,800	10,800
Repairs & Maintenance	5,360	28,471	12,000	12,000	12,000	12,000
Subscriptions	335	335	335	335	335	335
Superannuation	10,811	10,572	10,000	10,000	10,000	10,000
Wages	93,658	88,194	68,564	110,000	110,000	110,000
Worker's Compensation			6,285	9,600	9,600	9,600
Utilities	8,977	9,034	16,116	14,937	16,116	16,116
Total Expenses	479,763	443,125	252,425	275,283	259,939	244,442
Profit/Loss	−434,216	−371,973	−155,300	−122,639	−102,237	104,444