Farnan and Commissioner of Taxation

[2005] AATA 302

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2005] AATA 302

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No WT2003/93

TAXATION APPEALS  DIVISION		)
Re		LESTER FARNAN

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Associate Professor G A Barton, Member

Date7 April 2005

PlacePerth

Decision The Tribunal affirms the decision under review.

......(sgd G A Barton)…….

Member

CATCHWORDS

Income tax – deferred non-commercial business loss – performing arts business – author of a literary, dramatic, musical or artistic work – performing artist – production associate – Commissioner’s discretion

Income Tax Assessment Act, 1997 ss 35-10(2); 35-10(1)(a)(b)(c); 35-10(4); 35-10(5); 405-25(2)(3)(4)(5); 995-1; 35-30; 35-35; 35-40; 35-45

Taxation Administration Act, 1953 s 14ZZK (a)

REASONS FOR DECISION

7 April 2005 Associate Professor G A Barton, Member         

1.      The applicant, Mr Lester Farnan, was assessed to income tax in the year ended 30 June 2002 (‘the income year’) on the basis that his net business loss of $25,403 (‘the loss’) was a deferred non-commercial business loss for the purpose of the Income Tax Assessment Act 1997 (‘the Act’).  The relevant provisions are in Division 35 of the Act and they are applicable to assessments for the 2000/01 and later income years.  The respondent disallowed the applicant’s objection to the deferral of the loss and Mr Farnan has applied that this decision be reviewed.

2. The respondent, who was represented by Mr Frank Maloney, lodged documents T1 to T23 pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 and tendered documentary exhibits R1 to R9.

3.      Mr Farnan presented his application and gave evidence.  He placed an array of video and sound recording equipment on display in the hearing room and he tendered documentary exhibits A1 to A9.

4.      It was agreed by the parties that the applicant conducted a business in the income year and that the expenses giving rise to the loss were otherwise deductible under the Act.  So the only issue to be determined by the Tribunal was whether the loss was a deferred loss pursuant to Division 35 of the Act.  The applicant bore the onus of showing, on the balance of the probabilities, that it was not.

5.      Division 35 of the Act prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred.  The general rule in s 35-10(2) is that the Act applies as if the relevant loss were not incurred in that income year and as if it were an amount attributable to the business activity that can be deducted from assessable income from that activity for the next income year in which the activity is carried on.

6.      By s 35-10(1)(a), the general rule does not apply to a business activity that satisfies the assessable income test (s 35-30); the profits test (s 35-35); the real property test (s 35-40) or the other assets test (s 35-45).  It was not disputed, and the Tribunal finds, that the business activity conducted by the applicant in the income year satisfied none of the tests referred to in s 35-10(1)(a).

7. By s 35-10(1)(b), the general rule does not apply if the Commissioner has exercised the discretion set out in s 35-55 for the applicant’s business activity in the income year. The applicant contended in these proceedings, that the respondent ought to have exercised the discretion in s 35-55 for the applicant’s business activity in the income year. This ground was not stated by the applicant in his taxation objection to which the decision under review relates. The respondent was not opposed to the applicant raising this ground at the hearing and the Tribunal ordered, for the purpose of s 14ZZK(a) of the Taxation Administration Act 1953, that he was permitted to do so.

8.      By s 35-10(1)(c) and (4) the general rule does not apply to a business activity for an income year if the activity is a primary production business or a professional arts business and the taxpayer’s 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.

9.      It was not disputed, and the Tribunal finds, that the applicant’s assessable income from other sources in the income year was less than $40,000 (T13).

10.     The applicant’s principal contention is that his business activity in the income year was a professional arts business.

11.     By s 35-10(5), a professional arts business is a business carried on as the author of a literary, dramatic, musical or artistic work, or a performing artist or a production associate.  ‘Performing artist’  and ‘production associate’ are defined in sub-sections 405-25(2)(3)(4) and (5) of the Act, see s 995-1 – ‘performing artist’ and ‘production associate’, as follows:

“(2)     You are a performing artist if you exercise intellectual, artistic, musical, physical or other personal skills in the presence of an audience by performing or presenting:

(a)       music; or

(b)       a play; or

(c)       dance; or

(d)       an entertainment; or

(e)       an address; or

(f)        a display; or

(g)       a promotional activity; or

(h)       an exhibition; or

(i)        any similar activity.

(3)       You are also a performing artist if you perform or appear in or on a film, tape, disc or television or radio broadcast.

Production associate

(4)       You are a production associate if you provide ‘artistic support for:

(a)       an activity described in subsection (2); or

(b)       the activity of making a film, tape, disc or television or radio broadcast.

(5)       You provide artistic support for an activity if:

(a)       you provide services relating to the activity as:

(i)        an art director; or

(ii)       a choreographer; or

(iii)      a costume designer; or

(iv)      a director; or

(v)       a director of photography; or

(vi)      a film editor; or

(vii)     a lighting designer; or

(viii)     a musical director; or

(ix)      a producer; or

(x)       a production designer; or

(xi)      a set designer; or

(b)       you provide similar services relating to the activity.”

12.     Mr Farnan testified that he is employed 5 days a week as a sleep shift carer by Rocky Bay Inc. in one of its community homes.  He held a Western Australian driving instructor’s licence from 1980 until 2003, when it expired because he omitted to renew it.  He commenced his evidence by describing his business thus: “What I do is I give information and knowledge to families, and particularly young people about road use”.

13.     Mr Farnan testified that he worked as a driving instructor from 1980 to 1991.  In 1991, using $20,000 given to him by a friend, he started a business, as a sole trader, which was described in his income tax return for 1992 as ‘New Concept in Driver Education’ (T3).  He stated it was a new concept because he was not a driving instructor anymore and had found a new way of imparting knowledge to learner drivers.

14.     In order to attract custom he set up a tent at the Royal Show in Perth in 1991 that was decorated with coloured lights, tyres, cushions and photographs.  He had a sound system to play music and to address passers by and there was a banner on the tent, painted in red, which read ‘New Concept in Driver Education’.  He recorded interviews with interested parties in which he said that “young people need to be addressed in a fresh and original way, they need not be subjected to education and instruction and pedantic stuff like that but they just need information.”

15.     At this point in the proceedings the applicant tendered a letter of 30 July 1991 from the then Premier of Western Australia to Mr Farnan referring to a visit he made to her office on 25 July 1991 where he outlined his ideas and initiatives regarding better driver education (A1).  The Premier enclosed three letters introducing the applicant to Mr Len Thickbroom, Assistant Commissioner for Traffic (A2), Mr Bill Fanderlinden, Policy Officer, Office of the Minister for Police (A3) and Mr Rod Quinn, Senior Policy Officer, Office of the Minister for Education (A4).  The letters of introduction are identical and read as follows:

“This letter is to introduce Mr Lester Farnan who is vitally interested in establishing a unique and creative style of driver education aimed primarily at new drivers.

He is looking at initiating courses that will draw experts and key people into forums that would allow them to address young people in an original and fresh way.  Mr Farnan also envisages introducing films and videos to compliment (sic) all-day teaching sessions that will be run on weekends and through school holidays.  He is currently introducing this style of driver education through Presbyterian Ladies College.

For your information I have enclosed an outline of his initiatives and concepts which illustrate not only Mr Farnan’s enthusiasm, but his keenness for greater driver knowledge which he feels can best be obtained through a new and more creative driver education system.

I feel Mr Farnan’s ideas are exciting and worthy of greater attention and would therefore appreciate any advice or assistance you can give to him.”

16.     Mr Farnan testified that his efforts at the Royal Show attracted about 24 students ie 17 year olds and older wanting to learn how to drive.  They made an appointment by telephone and were accompanied by their parents.  The session lasted 10 hours.  Two hours were devoted to a discussion of the issues associated with learning to drive and eight hours were spent in the car with the learner driver at the wheel.  The car was modified for dual control.  This first session was followed by a 10 hour drive.  When asked by the Tribunal what issues were discussed in the initial 2 hour period, Mr Farnan replied “I’ve got to think back when in 1992 – the issues in those days I thought were mechanical and with a thinking component.  I always thought that the thought ruined the mechanics of, you know, bio-mechanics – the body movements … I’ve changed it now”.  He testified further that he had lots of sound effects.  He continued: “I call it noise.  It comes from signal to noise ratio in communication theory.  The problem is the noise, so I was, you know, quite wacky.  I wasn’t a driving instructor.  I was talking about signal to noise ratio.”

17.     In relation to what occurred once the learner driver was behind the wheel, Mr Farnan testified: “It cost me a fortune.  I couldn’t control those learners and there were lots of little collisions … and I was spending lots of money on repairs.  But I was learning.  I was getting heaps of information.  In fact I developed my whole philosophy from these experiments.”  When asked whether he instructed the driver on the ignition and gears of the car, the applicant responded: “no, no cockpit drill” and later “I would talk about the eyes.  I would talk about limbs.  I would talk about, you know, the feelings.  I started to develop this idea that it was all about sentiment and feelings and emotion and fear and anxiety and all that sort of stuff … so once you got them moving with the dual control if necessary then they were flowing and they found it easy and one of my learnings, one of my research learnings from the experiment was, people can go fast but they can’t go slow.  They can’t start the car, they can’t stop the car, they can’t manoeuvre the car.  The problem was not driving.  It was manipulation and I developed this idea it was physiological, it wasn’t something that an instructor can impart.  How can you tell someone about their physiology unless you are a physiologist.”

18.     At this point in his evidence the Tribunal asked Mr Farnan whether his customers had come to him to learn to drive and he replied “I made it clear that I wasn’t interested in the driving test … I banned conversation about testing.  They came to me for knowledge about causality, road crashes, that sort of thing and I remember I was developing this at that point”.  He later acknowledged that he did take some learners to the testing ground.

19.     The Tribunal then directed Mr Farnan’s attention to the nature of his business in later years and in particular, the income year.  He stated: “Well I got serious about it.  … I changed my development completely.  Remember, originally I thought it was biomechanical based on thought interference.  As the decade went on, I learned so much.  You can imagine.  You imagine going on gravel roads with learner drivers, I saw things that people didn’t know.  I had insight into what was causing things and I got very passionate about it and I changed actually from thought being the problem to feeling being not only the problem but also the solution”.

20.     The promotional material for the applicant’s business is headed ‘ABCDE” taken from the first letter in each of the following words: advanced, beginner, conscious, driving and experience (T18).  The applicant is described as a ‘driver mentor’ who wants “drivers to think clearly about what road use really is.  I also wish them to feel better about themselves whilst using the roads”.  The applicant testified that all his customers were people interested in driving a motor vehicle.

21.     The applicant testified that he sent his promotional material to certain high schools where he conducted some demonstrations in relation to motor vehicles at no, or a very low, fee.  In relation to the income year he said:

“… By the time it got to 2002, the year of the evidence is covered, it was quite different.  I insisted it was mandatory that the parents were involved.  I wasn’t interested in giving driving lessons, I was interested in the parents coming.  (a)  they were more my age.  The age for drivers has got lower, gone down to 16.  They are not very nice company I can tell you and they are not very bright and they are not very interesting.  I am generalising of course but they are not my type of people to associate with.  The parents came along.  They were a lot of fun and I was passing knowledge to the parents so that they could help their loved ones.  And that was my role and that is my role and that has always been my role, you know.  I mean, after 20 years or was it 10?  After 10 years of helping someone push a gear lever, you know, there is something bigger in life than that and I developed it and I am making money from it or at least I am making a bit of money from it and I want to make a lot of money from it by publishing.”

At a later point in his evidence he confirmed that what he did related to driving a motor vehicle.  He tendered a video tape (A7) as an example of the audio visual aids he uses in his business.  They are not sold in the open market.

22.     The applicant advertised his business in the yellow pages directory in the section for driving schools (R6).  His 2002/2003 price list refers to driver courses (T18).  His 2000/2001 price list refers to licensed and unlicensed drivers (R7).

23.     The Tribunal has given careful consideration to all the evidence in this matter, including the video recording that is exhibit A7, and it finds that the applicant’s business activity for the income year was not a professional arts business for the purpose of s 35-10(4)(a).  The Tribunal finds that none of the materials before it that were produced, made or written by the applicant constitutes a literary, dramatic musical or artistic work for the purpose of s 35-10(5)(a).  The Tribunal finds that the legislation is referring to works valued for their quality of literary, dramatic, musical or artistic form whereas the applicant’s materials in this matter either promote or aid his activities in relation to driving and road use and are otherwise unremarkable in form.

24.     The Tribunal finds that the applicant was not carrying on his business in the income year as a performing artist or a production associate for the purpose of ss 35-10(5)(b) and (c) of the Act.  The evidence at the hearing establishes that the applicant’s activities in the income year related to instruction on vehicle and road use.  Those attending or participating in his activities were intent on improving their relevant skills rather than simply witnessing, directly or indirectly, the personal skills of the applicant.  So it cannot be said that the applicant was a performing artist or a production associate at any stage in the income year for the purpose of ss 405-25(2) (3)(4) and (5) of the Act.

25.     Section 35-55 of the Act provides:

“(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.”

26.     The applicant contended that the respondent ought to have decided not to defer the loss because of special circumstances, for the purpose of s 35-55(1)(a), that made it unreasonable to do so.  He testified that one of the high schools where he made business presentations had closed.

27.     The Tribunal finds that no basis for exercising the discretion in s 35-55(a)(a) arises from the evidence.  There was no evidence that, but for the closure of the high school in question, the applicant’s business would have met one of the tests referred to in para.6 of these reasons.

28.     The Tribunal finds for the above reasons that the applicant has not proved, on the balance of the probabilities, that his assessment to income tax for the income year is excessive and so affirms the decision under review.

I certify that the 28 preceding paragraphs are a true copy of the reasons for the decision herein of Associate Professor GA Barton, Member

Signed …………………J Rainey ……………………………
  Associate

Date/s of Hearing  12 May 2004 and 21 June 2004
Date of Decision  7 April 2005
Counsel for the Applicant         Self represented   
Solicitor for the Respondent     Frank Maloney