DELACY v FC of T

Members:
H Olney DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 198

Decision date: 7 March 2006

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H Olney AM QC (Deputy President):

The proceedings

1. The Tribunal has before it a series of applications to review decisions of the respondent relating to the applicant's share of losses incurred in carrying on an olive growing business. In each case the applicant unsuccessfully sought the exercise of the respondent's discretion under s 35-55(1) of the Income Tax Assessment Act 1997 (the Act) so as to permit such losses to be claimed as a deduction against assessable income derived from other sources. The matters under consideration are:

2. The applicant is a legal practitioner who in each of the years ended 30 June 2002, 2003 and 2004 has derived income from the practice of law. In 1998, in partnership with his wife, he commenced a business of cultivating and producing olives. The olive growing business has been carried on at a loss in each of the years in question. The issue presently for determination is whether the discretion conferred by either of the two subparagraphs of s 35-55(1) of the Act should be exercised so as to allow the applicant a deduction of his share of the losses against his income from other sources.

Income Tax Assessment Act 1997 - Division 35

3. 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. It states:

"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."

4. The primary operative provision of Division 35 is contained in s 35-10 of the Act which (so far as presently relevant) provides:

"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) 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

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  • (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.

…

(4) The rule in subsection (2) does not apply to a business activity for an income year if:

  • (a) the activity is a primary production business, or a professional arts 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."

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

6. 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:

  • (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

  • 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) the business activity has started to be carried on and, for that or those income 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 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."

Chronology

7. The following chronology of relevant events will assist in identifying the matters in issue before the Tribunal.

1970: The applicant commenced a sheep grazing business on a 16 hectare property at Langley in Central Victoria (the Langley property) which he conducted in partnership with his wife.

June 1998: The applicant and his wife determined to commence a business of the cultivation and production of olives on the Langley property using the infrastructure, roads, sheds, dam and power already in place.

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Approximately 8 of the 16 hectares were determined to be suitable for olive production.

November 1998 : The first 320 olive trees were planted.

November 2000: A further 200 olive trees were planted.

7 May 2002: A Notice of Assessment was issued to the applicant for the income year 30 June 2001 whereby the loss incurred by the olive growing business was deferred pursuant to s 35-10(2).

November 2002: A further 80 olive trees were planted.

24 April 2003: The applicant applied for a private ruling on whether the respondent would exercise his discretion under sub-section 35-55(1)(b) to allow the inclusion of his share of losses from the olive growing business in the calculation of his taxable income for the income years ended 30 June 2001 to 30 June 2004 (inclusive).

27 May 2003 to 31 July 2003: The applicant provided the respondent with further information requested, including a business plan, profit and loss accounts of the business for the income years ended 30 June 1998 to 2002, projected income and expenditure figures for the income years ended 30 June 2003 to 2009, a projected depreciation schedule for the income years ended 30 June 2003 to 2009 and the profit and loss statement for the business for the income year ended 30 June 2003.

12 August 2003: The respondent informed the applicant that the private ruling had been determined and the respondent would not exercise his discretion in favour of the applicant.

28 August 2003: A Notice of Assessment was issued to the applicant for the income year 30 June 2002 whereby the loss from the olive growing business was deferred pursuant to sub-section 35-10(2).

9 October 2003: The applicant lodged a Notice of Objection to the private ruling in relation to the income years ended 30 June 2001 to 30 June 2004 (inclusive).

14 October 2003: The respondent informed the applicant that the objections against the private ruling in relation to the income years ended 30 June 2001 and 30 June 2002 were invalid in accordance with sub-section 14AZA of the Taxation Administration Act 1953 (the TAA) as an assessment had been made for those years of income. The respondent also informed the applicant that for the year ended 30 June 2001 the olive growing business fell within the exception in sub-section 35-10(4). (The respondent subsequently informed the applicant that the letter of 14 October 2003 incorrectly stated that the objection against the private ruling in relation to the income year ended 30 June 2002 was invalid in accordance with s 14ZAZA(2) of the TAA. Because the notice of assessment for the income year ended 30 June 2002 had not issued before the respondent issued the private ruling, the objection for that income year was valid.)

8 December 2003: A Notice of Decision on Objection against the private ruling was issued to the applicant disallowing the objections in relation to the income years ended 30 June 2002 to 30 June 2004.

27 January 2004: A Notice of Amended Assessment was issued to the applicant for the income year ended 30 June 2001 whereby the loss from the olive growing business was allowed in accordance with s 35-10(4).

10 February 2004 The applicant applied to the Tribunal for review of the respondent's decision of 8 December 2003 (proceedings VT2004/36-39).

13 May 2004: A Notice of Assessment was issued to the applicant for the income year ended 30 June 2003 whereby the loss from the olive growing business was deferred pursuant to sub-section 35-10(2).

30 August 2004: The applicant objected to the assessments for the income years ended 30 June 2002 and 30 June 2003 on the grounds that he was entitled to the exercise of the respondent's discretion under sub-section 35-55(1)(a) and sub-section 35-55(1)(b).

7 September 2004: The respondent requested the applicant to provide further information so that a decision could be made on the objections for the income years ended 30 June 2002 and 30 June 2003. The respondent also informed the applicant that s 14ZVA of the TAA precluded a taxpayer from objecting against an assessment where the subject matter of that objection had been the subject of a taxation objection against a private ruling. As the applicant's taxation objection against the

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private ruling issued on 12 August 2003 dealt with the Commissioner's discretion under sub-section 35-55(1)(b), the applicant was precluded from objecting against the assessments based on the same subject matter. The objection relating to sub-section 35-55(1)(b) was therefore treated as invalid.

3 October 2004: The applicant provided the respondent with the further information requested.

27 October 2004: A Notice of Decision on Objection relating to sub-section 35-55(1)(a) was issued to the applicant disallowing the objections in relation to the income years ended 30 June 2002 and 30 June 2003. The respondent informed the applicant that the objection relating to sub-section 35-55(1)(b) had been treated as invalid by virtue of s 14ZVA of the TAA.

13 December 2004: The applicant applied to the Tribunal for a review of the respondent's decision of 27 October 2004 and asked that the matter be heard together with proceedings VT2004/36-39 (proceedings VT2004/338-339).

2 March 2005: The applicant applied for a private ruling on whether the respondent would exercise his discretion under sub-section 35-55(1)(a) to allow the applicant to include any losses from the olive growing business in the calculation of his taxable income for the income year ended 30 June 2004.

March 2005: A further 400 olive trees were planted on the Langley property.

6 April 2005: The respondent issued a private ruling in relation to the income year ended 30 June 2004 and ruled that the discretion would not be exercised in favour of the applicant.

30 April 2005: The applicant objected to the decision on the private ruling.

10 May 2005: A Notice of Decision on Objection was issued to the applicant disallowing the objection in relation to the income year ended 30 June 2004.

31 May 2005: The applicant applied to the Tribunal for a review of the respondent's decision of 10 May 2005 and asked that the matter be heard together with proceedings VT2004/36-39 (proceeding VT2005/330).

Review of private ruling

8. The role and function of a private ruling made by the respondent was discussed in detail in the judgments of the Full Court of the Federal Court of Australia in
Federal Commissioner of Taxation v McMahon and Another 97 ATC 4986. In that case, 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."

and in relation to an application to the Tribunal for review of a private ruling his Honour said (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. The tribunal may form its opinion as to how the tax law operated or would operate on the facts that constitute the arrangement; and it may disagree with the Commissioner and alter the objection decision. But the review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is that the facts are not necessarily the facts that will underlie the making of any ultimate assessment. If the factual matrix as explained to the Commissioner in aid of a request for a private ruling are suspicious, the Commissioner has ample powers to

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decline to make a private ruling. 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 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. The question for the tribunal is whether the Commissioner's opinion as to the application of the law concerning the arrangement is correct. In considering the correctness or otherwise of the objection decision the tribunal must be limited to the facts as identified by the Commissioner in his ruling as constituting the arrangement."

9. Tribunal applications VT2004/36-39 and VT2005/330 each seek review of a private ruling made by the respondent. In these circumstances it is necessary for the Tribunal to identify the arrangements upon which the rulings in question were based and to conduct its review without redefining those arrangements. The position is however different in relation to applications VT2004/338-339 in which the applicant seeks review of an objection decision relating to assessments of income tax. In the latter cases it is open to the Tribunal to have regard to evidence placed before it.

The evidence

10. For the most part the applicant relies upon the material and information made available to the respondent during the private ruling and objection process. A statement made by the applicant was tendered in evidence before the Tribunal and the applicant gave brief evidence (both in-chief and by way of cross-examination) at the hearing. Of particular importance, having regard to the provisions of s 35-55(1)(b)(ii), are documents referred to in the respondent's Notice of Private Ruling and the reasons for decision in relation to the objection against the private ruling, namely an olive information fact sheet from the South Australian Department of Primary Industries and information from Olives Australia.

11. Central to the issues raised by sub-section 35-55(1)(b)(ii) is the independent evidence provided by the applicant in the form of information from Olives Australia which suggests that the commercially viable period for the olive growing industry is five years from the time of planting at which time the first commercial harvest is expected. This expression of opinion has not been challenged nor is it in dispute that the applicant's olive growing business commenced in June 1998 with the first planting of trees occurring in November 1998.

12. A business plan submitted by the applicant with his original application for a private ruling, under the heading Where are we now? states (inter alia):

"We have carried on a sheep grazing partnership since 1970.

In 1998 we made a decision to concentrate all our efforts into olives in order to derive the maximum profit from a 16 hectare property.

The necessary infrastructure, roads, sheds, dam and power were already in place.

Soil tests reveal that the property is suitable for olive production.

We presently have 600 olive trees and will harvest our first crop in Autumn 2003."

and under the heading Where do we want to be in five years? it is said:

"Realistically, we have approximately 8 hectares suitable for olive production and it is our intention to increase our planting to a total in excess of 2000 olive trees at a rate of 250 trees per hectare. We had intended to reach this figure by 2002 but were forced to delay planting because of the current drought."

In a letter to the respondent dated 27 May 2003 the applicant wrote:

"Tree Plantings are as follows:-

November 1998 320 trees planted
August 2000 200 trees planted
November 2002 80 trees planted

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We are currently holding on our property an additional 440 trees which will be planted as soon as weather conditions permit making a total of 1040 trees."

The first application for private ruling

13. In his first application for private ruling (dated 24 April 2003) the applicant indicated that the business commenced on 1 June 1998 and that the business activity was

"An olive farm with 600 olive trees planted on 3 hectares operated by myself and my partner. We intend to sell olive oil. As soon as the current drought ends we intend to increase the planting to at least 2000 trees."

The nature of the activity is stated to be the basis for the application for the exercise of the Commissioner's discretion and in response to the question:

"What is the inherent or innate feature of your activity that has meant there is a period of time from when it commenced to when it meets one of the tests?"

the applicant stated:

"Olive trees do not produce until year 4 and do not reach full production until year 8."

In answer to the question:

"In which income years do you expect your business activity to first meet any of the 4 tests?"

the responses given were:

Assessable income text - 2008-09;

Profits tests - 2006-07;

Real property test - 2009;

Other assets test - 2009.

The applicant further stated that he expected his business activity to make a tax profit in the year 2004.

14. The respondent refused to exercise his discretion as sought by the applicant and gave notice to this effect on 12 August 2003. On 9 October 2003 the applicant gave notice of objection against the ruling and on 8 December 2003 the respondent gave notice of his decision to disallow the objection in relation to the income years ending 30 June 2002, 2003 and 2004. (The objection in relation to the 2000-2001 was treated as invalid.)

The objection to the 2002 and 2003 assessments

15. The respondent issued an assessment of income for the year ended 30 June 2002 on 28 August 2003; and on 13 May 2004 an assessment for the year ended 30 June 2003 was issued. In each case the respondent disallowed the applicant's losses from the olive growing business which were deferred pursuant to s 35-10(2). On 30 August 2004 the applicant objected to each of these assessments on the following grounds:

"A. The assessment is not authorised or required by the provisions of the 1936 Act or the 1997 Act and is arbitrary, capricious, erroneous and contrary to law.

B. Without limiting the generality of the foregoing, I should be entitled to claim as a deduction under s 92(2) of the 1936 Act my share of a partnership loss distributed to me by the Partnership of Ian G & Helen M Delacy, being the sum of $9,390. Section 35-10 of the 1997 Act does not prevent me from claiming the deduction, for the following reasons:

  • 1. The Commissioner should have been satisfied that it would be unreasonable to apply the rule in s 35-10 on the grounds set out in s 35-55(1)(a), namely, that the business activity was affected by special circumstances outside my control.
  • 2. Further or alternatively, the Commissioner should have been satisfied that it would be unreasonable to apply the rule in s 35-10 on the grounds set out in s 35-55(1)(b), namely, that the business activity had commenced and for the year of income -
    • (a) because of its nature, it has not satisfied one of the tests set out in section 35-30, 35-35, 35-40 or 35-45 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 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.

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C. Without limiting in any way the generality of any ground hereof, if the Commissioner has purported to form any opinion or to be satisfied or to have failed to be satisfied as to any matter or to have exercised any discretion or power under the Act as the basis of or as justifying the assessment (which is denied) then such purported opinion, or satisfaction or failure to be satisfied or exercise of discretion or power is arbitrary, capricious, erroneous or unreasonable or based upon a mistake or inadequate understanding of the relevant facts or law or upon a taking into account of matters that ought not to have been taken into account or upon an omission to take into account matters that ought to have been taken into account and it should now be reviewed and corrected by the Commissioner or alternatively by the Administrative Appeals Tribunal or alternatively set aside by a Court should the matter be referred to the Administrative Appeals Tribunal or the Courts for review."

In response to a request for further information the applicant wrote by letter dated 3 October 2004:

1. In the Business Plan originally submitted to the Australian Taxation office we indicated that, commencing in 1999, it was our intention to have planted a minimum of 2000 olive trees by 2002, however due to severe drought it was not possible to make those further plantings and the crop yield was significantly reduced. In addition to the 600 trees planted we currently hold 400 trees in pots for planting as soon as the drought breaks. It is then our intention to plant an additional 1000 trees to bring the total number to 2000.

The average rainfall for the Kyneton district in normal years is 752mm (Median 760mm). For the years 2001, 2002 and 2003 the average rainfall has been 542mm. I submit copy rainfall charts kept for this property together with information supplied by the National Climate Centre and Bureau of Meteorology.

We have a large dam, constructed in 1990, with a surface area of 3000m2 and an average depth 2.5m. In a normal year the dam remains full during the summer period and would be more than sufficient to irrigate in excess of 2000 olive trees. In the summers of 2001, 2002 and 2003 the dam has been empty. Nearby Lake Eppalock has also been empty for a similar period and I enclose an extract from the Melbourne Age of 9-9-04.

2. I have no control over drought and have no source of irrigation water other than rainfall.

3. I believe that if I had been able to plant in excess of 2000 trees before 2002 then I would have satisfied both the Assessable income test and the Profits test."

(The letter also enclosed the rainfall charts and other material referred to in paragraph 1.)

16. On 27 October 2004 the respondent gave notice of his decision to disallow the applicant's objections to the 2001-2002 and 2002-2003 assessments.

The second application for a private ruling

17. By application dated 2 March 2005 the applicant sought a private ruling in respect of the income year commencing 1 July 2003 and ending 30 June 2004. The application describes the business activity as

"An olive farm with 1000 olive trees planted on 40 acres at Langley Vic. We intend to sell olive oil.

It is our intention to increase the number of olive trees to in excess of 4000."

The application does not indicate the basis upon which the respondent's discretion is sought nor does it state (in response to question 13) which of the four tests special circumstances prevented the applicant meeting. However, in response to question 14 (the nature of your activity) the applicant stated that the accepted number of years before the business activity becomes commercially viable is 6, and that the years in which the activity is expected to meet the 4 tests are:

Assessable income test 2008-09
Profits test 2006-07
Real property test 2009
Other assets test 2009

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It is further stated that the business activity is expected to make a tax profit in 2006. The explanation provided for the basis of the projected income and expenditure is:

"I rely on the material submitted with my application dated 24/4/2003. The only variation being that I have increased the number of trees from 600 to 1000."

and in response to the question What is the inherent or innate feature of your activity that has meant there is a period of time from when it commenced to when it meets any of the tests, the applicant stated:

"I rely on material previously submitted."

18. On 22 March 2005 the applicant sent the following email message to the respondent's delegate:

"I refer to your phone call and, as suggested by you, confirm that my application is now based on special circumstances, namely drought, in addition to the nature of my activity, olive growing. The information relied on is that contained in my application, in my earlier application dated 24-4-03 and in all of the correspondence with the ATO since that original application. If you require additional information, such as projected income and expenditure, please let me know. As I did not complete item 13 in my application I reserve the right to add any further information that may become relevant."

19. On 6 April 2005 the respondent gave notice to the applicant that the respondent would not exercise the discretion under s 35-55(1)(a) as sought by the applicant. The applicant gave notice of objection to the ruling on 30 April 2005 and on 10 May 2005 the respondent gave notice disallowing the objection.

Review of the decision on objection to the first private ruling

20. In the respondent's Notice of Private Ruling dated 12 August 2003 the subject matter of the ruling is identified as:

"Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your olive growing activity (described below) in your calculation of taxable income for the income tax years ended 30 June 2001 up to and including 30 June 2004?"

The arrangement that is the subject of the ruling is described in the following terms:

Facts

1. The arrangement that is the subject of this ruling is described below. The description incorporates the matters set out in the following documents:

  • • Your application for Private Ruling dated 24 April 2003 on the exercise of the Commissioner's discretion in section 35-55 of the ITAA 1997 incorporating:
    • - Your answers to the questions contained in the application form.
    • - A copy of your Business Plan.
    • - A copy of your Business Registration Certificate dated 20 July 1999.
    • - A copy of your financial statements for the years ended 30 June 1999 to 2003.
    • - A copy of your net profit projections from the years ended 30 June 2004 to 2009.
    • - A copy of olive information fact sheet from the primary Industries South Australia and a copy of olive information from Olives Australia.
  • • Facsimiles from you providing further financial information, dated 27 May 2003, 30 June 2003 and 31 July 2003.
  • • Notes from telephone conversations.

Summary of Arrangement

2. A summary of the arrangement that is the subject of this ruling is outlined in the following paragraphs.

Description

3. Your activity is olive growing which commenced in June 1998.

Trees

4. In November 1998 you planted 320 olive trees on 6 hectares of your property. In August 2000 you planted a further 200 trees and in November 2002 an additional 80 trees.

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Property

5. Your olive growing activity is conducted on land at Langley Central Victoria. The total land area is sixteen hectares of which approximately eight hectares is suitable for olive production.

6. You had soil and plant analysis conducted to determine whether your property was suited to olive growing.

Capital Investment

7. To date you have acquired new plant and equipment.

Business registrations

8.You have registered a business name.

Paragraph 9 of the notice is headed Profit Projections and contains a table of actual income and expenses for the years ended 30 June 1999 to 30 June 2003 and the projected figures for each of the years ended 30 June 2004 to 30 June 2009. The following details have been extracted from the table:

Year ended 30 June Actual/Projected income Actual/Projected profit/loss
1999 932 11,329/L
2000 3,187 16,947/L
2001 3,842 8,134/L
2002 262 12,520/L
2003 600 11,794/L
2004 4,200 1,269/L
2005 8,400 2,392
2006 16,800 5,106
2007 29,400 15,251
2009 44,800 27,688
2009 56,000 36,911

(The income for the years 1999-2002 is from other sources and does not include any income from the olive growing activity. In each of the subsequent years the whole of the income relates to olive growing.)

21. In paragraph 10 of the notice under the heading Lead Time, it is stated:

"The independent evidence you provided from Olives Australia suggests that the commercially viable period for the olive growing industry will be five years from the time of planting at which time the first commercial harvest is expected."

And at paragraph 11 the ruling asserts:

"You state your olive growing activity has never satisfied, and currently does not satisfy any of the tests set out in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) of the ITAA 1997."

22. It is clear that the arrangement described in the respondent's Notice of Private Ruling provides no basis upon which the discretion referred to in s 35-55(1)(b) can be exercised in favour of the applicant. The arrangement as described is premised on the accepted independent evidence of Olives Australia that the commercially viable period for olive growing is five years from the time of planting at which time the first commercial harvest is expected. The actual and projected income and expenses in relation to the olive growing business demonstrate that neither the assessable income test nor the profits test would be satisfied until the year ended 30 June 2007 which is well outside the five year lead time accepted in relation to olive growing. Although no mention is made in the ruling of the prospect of passing either of the other two tests (real property test and other assets test) it follows from the material provided by the applicant in his application that neither of those tests were ever in contemplation. The critical factual issues are that the arrangement described by the respondent relates to an activity which commenced in June 1998 and involves a business which, according to independent expert opinion, would be expected to become commercially viable within five years from the time of planting. The first planting of trees was in November 1998; the activity was not commercially viable within the period of five years from that date.

Review of the objection to the 2002 and 2003 assessments

23. The applicant's objections to the tax assessments for the years ended 30 June 2002 and 2003 were initially based upon grounds relating to paragraphs (a) and (b) of s 35-55(1) of the Act. The respondent considered that grounds of objection relating to paragraph

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35-55(1)(b) to be invalid. At paragraph 15 of his reasons for decision, the respondent said:

"Section 14ZVA of the Taxation Administration Act 1953 precludes you from objecting against an assessment where the subject matter of the objection has been the subject matter of a taxation objection against a private ruling. As your objection against the private ruling which issued to you on 12 August 2003 dealt with the Commissioners discretion under paragraph 35-55(1)(b) of the ITAA 1997, you are not entitled to object against the same subject matter in your objection against the assessments."

In these circumstances the respondent dealt with the objection on the basis that his discretion was sought in relation to the claim for special circumstances under paragraph 35-55(1)(a). No issue has been raised in connection with this aspect of the respondent's decision and the review application has been conducted on the basis that it related only to paragraph 35-55(1)(a).

24. The applicant claims that by reason of substantially reduced average annual rainfall in the Kyneton area in the years 2001-2003, he was unable to develop his olive growing business in accordance with the business plan submitted to the respondent in support of his original application for a private ruling. At that time (April 2003), 600 trees had been planted (320 in November 1998, 200 in November 2000 and 80 in November 2002). In the business plan it was asserted that it was originally intended to increase planting to a total in excess of 2000 trees by 2002, but he was forced to delay planting because of the then current drought. The drought is put forward as the special circumstances outside the control of the operators of the business activity which it is said rendered it appropriate for the respondent to exercise his discretion in favour of the applicant for the years ended 30 June 2002 and 30 June 2003.

25. The material before the Tribunal indicates that in the years 2001-2003 the average rainfall in the Kyneton area (in which the applicant's property is situated) was considerably less than normal, to the extent that it would be reasonable to describe the conditions in that period as being affected by drought amounting to special circumstances outside of the applicant's control. The respondent does not take issue with this conclusion, but rather says that the evidence does not support the conclusion that but for these special circumstances the applicant's activity would have passed one of the four tests in the 2001-2002 and 2002-2003 income years.

26. The Note to s 35-55(1)(a) makes it clear that the paragraph is intended to provide for a case where a business activity would have satisfied one of the four tests if it were not for the special circumstances. Realistically, the only test that the applicant could reasonably expect to take advantage of in either of the two income years in question is the assessable income test and to do this he must demonstrate that but for the special circumstances the olive growing activity would have produced an assessable income of at least $20,000 in either or both of the relevant years.

27. The facts relevant to the present issue are:

On the basis of these facts the following conclusions may be drawn:

28. Having regard to the foregoing facts, there is no basis to support the applicant's claim that but for the special circumstances referred to above, his olive growing business activity would have satisfied one of the four tests in either the 2001-2002 income year or the 2002-2003 income year. There is therefore no basis upon which the discretion conferred by s 35-55(1)(a) could be exercised in the applicant's favour.

Review of the decision on objection to the second private ruling

29. The applicant sought the exercise of the respondent's discretion under s 35-55(1)(a) for the income year 2003-2004 on the basis of the same special circumstances (drought) as were relied upon in his objection to the assessments of tax for the years ended 30 June 2002 and 2003. In his application for private ruling the applicant relied upon the material previously put before the respondent.

30. For the applicant's business activity to have satisfied the assessable income test for the income year 2003-2004, it would be necessary for the activity to have generated not less than $20,000 income in that year. The evidence indicates that the first planting of 320 olive trees could be expected to have provided a crop in the income year 2002-2003 and it could be expected that there would be a second crop in the income year 2003-2004. The second planting of 200 trees in August 2000 would not be expected to provide a crop until the income year 2004-2005 and thus is irrelevant to the present matter under consideration.

31. The material put before the respondent in relation to the applicant's first application for private ruling, which he relied upon in support of the application now under consideration, indicated that in the second year of crop (that is after 5 years from planting) a yield of 20 kilograms per tree could be expected. Again using the applicant's claimed return of $1.40 per kilogram, the second crop from the first 320 trees could be expected to yield a gross return of $8960, again substantially short of the $20,000 required to satisfy the assessable income test.

32. The special circumstances that are relied upon by the applicant, namely drought in the years 2001-2003 had no bearing upon the applicant's decision to engage upon a staged planting of trees over a period of years. To have satisfied the assessable income test for the income year 2003-2004, the applicant would have had to plant substantially more trees in either or both of the 1998-1999 and 1999-2000 income years. It is not suggested that the drought had any bearing upon this aspect of the business activity.

Conclusions

33. Having regard to the foregoing, the decision of the Tribunal is that:

 

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