Decision impact statement

Hance & Anor v Federal Commissioner of Taxation

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Court Citation(s):
[2008] FCAFC 196
2008 ATC 20-085
74 ATR 644

Venue: Federal Court of Australia
Venue Reference No: NSD 492-3 of 2008
Judge Name: Finn, Dowsett & Edmonds JJ
Judgment date: 19 December 2008
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• TR 2007/8
• GSTR 2008/D1

Subject References:
Managed Investment Schemes
Deductions for contributions

Précis

Outlines the Tax Office's response to this case which concerned the application of section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 97') to an investor's contributions to a registered agricultural managed investment scheme ('MIS'). It proceeded by way of a private ruling testing the Tax Office view in TR2007/8.

Decision Outcome:

Adverse

Brief summary of facts

The applicants applied for private rulings in relation to their proposed involvement in the '2009 AIMA Almond Investment Scheme' ('the Scheme'), which was to be registered as a managed investment scheme under the Corporations Act 2001 (Corporations Act).

They did so in order to test the view of the Commissioner published in public ruling TR 2007/8, which reflected a change from that previously set out in TR 2000/8.

The Responsible Entity of the Scheme for the purposes of the Corporations Act was to be AIMA Limited ('AIMA'), and the applicants were to enter into an Almondlot Management Agreement ('the management agreement') with AIMA, as well as a sub-lease, in relation to the growing and harvesting of almonds for sale (under which the applicants would gain limited rights to access their own Almondlots). The operation of the Scheme was also to be governed by the Scheme's Constitution, and various other documents.

Outgoings were to be incurred by the applicants over the life of the Scheme (23 years, with the possibility of a further two years), including amounts for 'rent' and 'management fees', as well as amounts referred to as a 'responsible entity fee' ('the relevant outgoings').

The applications for private ruling asked the Commissioner to rule on whether the relevant outgoings were allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Commissioner ruled, consistently with TR 2007/8, that the relevant outgoings were capital, or capital in nature, being for the acquisition of the applicants' interests in the Scheme, chiefly their right to share in the net proceeds from the Scheme as a whole. This stance was maintained on objections being lodged against the private rulings. Subsequently, applications were made to the Federal Court, and the Chief Justice agreed to the matters being heard by a Full Federal Court.

Issues decided by the court or tribunal

The Commissioner argued that the applicants' involvement in the Scheme would be as 'passive investors', as borne out by the extent to which they would delegate their ability to control the relevant operations to AIMA, and by the fact that they would have no proprietary right in proceeds from the sale of almonds produced on their Almondlots. Instead, it was submitted that they would obtain, in substitution, the right to share rateably in the proceeds of sale of almonds produced by the Scheme as a whole. This was said to follow particularly from those terms of the Scheme documentation concerning the pooling of almonds.

These factors were said to result in the conclusion, amongst others, that the applicants would not be carrying on business as a consequence of their membership of the Scheme.

The Commissioner argued that the applicants' relevant outgoings would obtain for them a capital asset in the form of the right to share proportionately in the net proceeds of the Scheme.

Alternatively, it was submitted that these net proceeds would be held on trust by AIMA for all members of the Scheme, under subsection 601FC(2) of the Corporations Act, which concerned the holding of 'scheme property'. This was consistent with the proposition that the effect of the management agreement would be to convert a proprietary interest in the almonds grown on the applicants' Almondlots into personal rights against AIMA for a rateable portion of the net sale proceeds from the Scheme as a whole.

Carrying on business

The Court rejected the argument that the applicants would give up any right of ownership of almonds produced on their Almondlots, and held that, up until their sale, the applicants would retain such ownership, which would extend to them being able to withdraw their almonds from any pooling arrangement up until the point of sale.

The Court also rejected the argument that the extent of delegation to AIMA would have any material effect. In particular, the Court said that the argument of the Commissioner here 'focuses too much upon what the applicants will not be doing and pays too little attention to what they will be doing' (at [77]).

The Court referred to certain authorities concerning long established principles to do with the question of whether taxpayers carry on business, and, on the facts before them, held that the applicants would be doing so in relation to their membership of the Scheme.

Beneficiaries of a trust

The Court also held that AIMA would not hold any scheme property on trust in a way that would lead to the conclusion that payment of the relevant outgoings would be in exchange for the acquisition of 'an identifiable asset which will produce the net proceeds of sale of his crop' (at [103]). In the likely event that sales would be made from the almond pool it was held that AIMA would hold the gross proceeds from such sales on trust for members of the Scheme 'in accordance with their respective entitlements in those proceeds' (at [101]).

Characterisation of the relevant outgoings

The Court held that the relevant outgoings would be incurred in the course of carrying on a business, and that the question of their character was governed by their legal form on the face of the documentation, as rent or management fees (including responsible entity fees). Having rejected the arguments that the applicants would be passive investors, and that their outgoings would be on capital account it followed that:

The only answer open is that the relevant outgoings will be incurred as operating expenses in carrying on each applicant's business. It follows that they are deductible pursuant to s 8-1 of the 1997 Act. (at [110])

The Commissioner accepts the decision of the Full Federal Court as authoritative in relation to similar schemes, and will not seek special leave to appeal to the High Court.

Tax Office view of Decision

The decision of the Full Federal Court that the applicants would be carrying on a business was open to the Court on the facts of the case and it is not apparent that the decision is attended by any relevant error of law.

The Commissioner considers that the decision of the Full Federal Court provides greater certainty in relation to the application of the law to deductions for contributions to registered agricultural managed investment schemes.

Administrative Treatment

Implications on current Public Rulings & Determinations

Taxation Ruling TR 2007/8 will be withdrawn. Draft GST Ruling GSTR 2008/D1 will also be withdrawn. The Commissioner will consider whether a new ruling is needed.

Applications for product rulings in relation to schemes similar to that considered by the Full Federal Court will be handled in accordance with the Court's decision.

No new principles have been established in relation to the question of whether members of such schemes will carry on a business as a result. However, retention of ownership by individual members, of the produce of the scheme, was of critical importance in this matter (as explained above), and it will be necessary to ensure that this feature is present in order to reach the same conclusion as that reached by the Court.

The decision also provides clarification of the scope of subsection 601FC(2) of the Corporations Act 2001. It is not anticipated that very many, if any, of the schemes in question will involve a conclusion that the responsible entity will hold on trust any income-yielding asset for all members of the scheme. This issue therefore should not affect being able to conclude that scheme members carry on their own separate businesses.

Implications on Law Administration Practice Statements

No PS(LA)s affected.

Legislative References:
Income Tax Assessment Act 1997
8-1

Corporations Act 2001
Chapter 5C

Case References:
Sun Newspapers Ltd and Associated Newspapers Ltd v FCT
(1938) 61 CLR 337
[1938] HCA 73
[1938] ALR 498

Clowes v FCT
(1954) 91 CLR 209
[1954] HCA 10
[1954] ALR 293

Vincent v FCT
(2002) 124 FCR 350
(2002) 2002 ATC 4742
(2002) 51 ATR 18

FCT v Emmakell Pty Ltd
(1990) 22 FCR 157
(1990) 90 ATC 4319
(1990) 21 ATR 346

Ferguson v FCT
(1979) 37 FLR 310
(1979) 79 ATC 4261
(1979) 9 ATR 873

Puzey v FCT
(2003) 131 FCR 244
(2003) 2003 ATC 4782
(2003) 53 ATR 614

Milne v FCT
(1976) 133 CLR 526
(1976) 76 ATC 4001
(1976) 5 ATR 785

Vincent v FCT
(2002) 50 ATR 20
(1976) 76 ATC 4001
(1976) 5 ATR 785

FCT v Raymor (NSW) Pty Ltd
(1990) 24 FCR 90
(1990) 90 ATC 4461
(1990) 21 ATR 458

Hallstroms Pty Ltd v FCT
(1946) 72 CLR 634
[1946] HCA 34
[1946] ALR 434

FCT v Walker
(1984) 2 FCR 283
(1984) 84 ATC 4553
(1984) 15 ATR 847

Southern Wine Corporation Pty Ltd (In Liq) v Frankland River Olive Co Ltd
(2005) 31 WAR 162
[2005] WASCA 236

Re Global Finance Group Pty Ltd (In Liq); ex parte Read
(2002) 26 WAR 385
[2002] WASC 63

Mier v FN Management Pty Ltd
[2006] 1 QdR 339
[2005] QCA 408

Secretan v Hart
[1969] 1 WLR 1599
[1969] 3 All ER 1196

Gideons International Service Mark
(1991) 108 RPC 141