HVZZ and Commissioner of Taxation
[2015] AATA 133
•5 March 2015
[2015] AATA 133
Division TAXATION APPEALS DIVISION File Number
2014/0530
Re
HVZZ
APPLICANT
And Commissioner of Taxation RESPONDENT
Decision
Tribunal Senior Member CR Walsh
Date 5 March 2015 Place Perth The Tribunal affirms the decision under review.
……(Sgd) CR Walsh………………...............
Senior Member CR Walsh
Catchwords
INCOME TAX – private rulings – non-commercial business loss deferral rule – Commissioner’s discretion not to apply rule – “additional information” not materially different from scheme to which ruling relates – whether commencement of a new “business activity” - objective expectation of tax profit – commercially viable period for industry concerned – Commissioner’s ruling on the scheme as identified in the PBR correct - objection decision affirmed
Legislation
Income Tax Assessment Act 1997 – s 35-10(1)(a) – s 35-10(1)(b) – s 35-10(1)(c) - s 35-10(2) – s 35-10(2E) – s 35-30 – s 35-35 – s 35-40 – s 35-45 – s 35-55(1) - s 35-55(1)(c) – s 35-55(3) - s 995-1
New Business Tax System (Integrity Measures) Act 2000
Taxation Administration Act 1953 – s 14ZZK(b)(iii) – Pt IVC - s 359-5 – s 359-25 – s 359-35 – s 359-60 - s 359-65(1) – s 388-50
CASES
Bellinz Pty Ltd and Others v Commissioner of Taxation [1998] FCA 615; (1998) 84 FCR 154
Bentivoglio and Commissioner of Taxation [2014] AATA 620
Commissioner of Taxation v Executors of the Estate of Subrahmanyan [2001] FCA 1836; (2001) 116 FCR 180
Commissioner of Taxation v McMahon and Another [1997] FCA 1087; (1997) 79 FCR 127
Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508; (2010) 79 ATR 582
Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Commissioner of Taxation [2013] AATA 99
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60; 24 ALR 577
Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496
HVZZ 1761 of 2011 and Commissioner of Taxation [2011] AATA 779
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Lamont v Commissioner of Taxation (2005) 144 FCR 312
The Public Servant and the Commissioner of Taxation [2014] AATA 247
Secondary Materials
Explanatory Memorandum to the New Business Tax System ( Integrity Measures) Bill 2000 – paragraph 1.19
Taxation Ruling TR 2007/6
REASONS FOR DECISION
Senior Member CR Walsh
5 March 2015
INTRODUCTION
HVZZ applied to the Commissioner for a private ruling on the exercise of his discretion in s 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) not to apply the non-commercial loss deferral rule in s 35-10(2) of the ITAA 1997 and to allow HVZZ to include losses from her horse breeding “business activity” in the calculation of her taxable income for the 2011/2012 to the 2017/2018 income years.
The Commissioner ruled that he would not exercise his discretion in s 35-55(1)(c) of the ITAA 1997, HVZZ objected to the Commissioner’s ruling[1], the Commissioner disallowed HVZZ’s objection and HVZZ applied to the Tribunal for a review of the Commissioner’s objection decision.
[1] HVZZ withdrew the 2011/2012 financial year from her objection before the Commissioner decided her objection.
The ultimate issue for determination by the Tribunal in this case is whether the Commissioner’s decision not to exercise his discretion in s 35-55(1)(c) of the ITAA 1997 is correct[2] (as the Commissioner contends) or whether that decision “should not have been made or should have been made “differently” (as HVZZ contends).[3]
[2] See Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 68; 24 ALR 577 at 589 per Bowen CJ and Deane J.
[3] Section 14ZZK(b)(iii) of the Taxation Administration Act 1953.
factual & procedural BACKGROUND
On 22 May 2013, HVZZ applied to the Commissioner for a private ruling on the exercise of the Commissioner’s discretion in s 35-55(1)(c) of the ITAA 1997 in relation to the 2011/2012 to the 2017/2018 income years.
HVZZ’s private ruling application (PR Application) comprised the following documents (PR Application Documents):
(i)A letter from Mr Kevin Shields, Partner - Taxation, Grant Thornton Australia Limited to the Australian Taxation Office (ATO), dated 22 May 2013 (Shields Letter), which states:
…set out in this letter and attached documents the matters that we believe are relevant for the Commissioner to consider in determining whether to exercise his discretion pursuant to sub-section 35-55(1)(c) of the [ITAA 1997] to allow [HVZZ] to deduct business losses for the 2012 and subsequent income years;
(ii)A completed ATO form titled “Application for a private ruling on the Commissioner’s discretion for non-commercial business losses”, dated 22 May 2013 and signed by Mr Shields as the HVZZ’s representative. As required by the ATO, attached to this completed form was another completed ATO form titled “Non-commercial losses, evidentiary checklist”;
(iii)An undated letter signed by Mr Allan R Preston (Preston Letter) addressed “To whom it may concern”. In the Preston Letter Mr Preston describes himself:
As a professional with over 38 years of experience in breeding horses…..
Mr Preston closes the Preston Letter with the sentence:
For most if not all horse breeding businesses it is plausible & equitable to say that one would not expect see a net surplus return for some 10 to 15 years into production.;
(iv)A copy of Private Ruling Number 1011521676174. It appears from the footer of this document that the copy was downloaded from the ATO’s website on 25 March 2013; and
(v)A “Business Plan”, titled “[M] Arabians Business Plan Prepared: April 2013” (Business Plan).
The Shields Letter includes the following (at 1-2):
Background
The taxpayer owns and operates a horse breeding business known as [M] Arabians (“[M]”) and has done so since the 2000 income year.
The Australian Taxation Office (“ATO”) commenced an examination of the taxpayer’s 2005 income tax return prior to issuing the assessment and concluded that the horse breeding did not constitute carrying on a business. Accordingly the 2005 and 2006 income tax assessments were issued on the basis that the deductions for losses incurred for the horse breeding business were disallowed.
The taxpayer objected to the assessments and on 30 January 2009 the objections were allowed in full, stating that the Commissioner considered that by applying the facts of the taxpayer business operations to the indicators as set out in Taxation Rulings TR 97/11 and TR 2008/2, her activities constituted the carrying on of a commercial business for tax purposes. She has subsequently offset the losses against other income and capital gains, subject to her satisfying the $250,000 other assessable income cap, within sub-section 35-10 (2E) of ITAA97.
Business activity and request for the Commissioner’s discretion
The activity for which we seek the Commissioner’s discretion pursuant to sub-section 35-55(1)(c) is the horse breeding business undertaken by the taxpayer. We seek his discretion to allow the taxpayer to offset her business losses against other income in the 2012 and subsequent income years. This is on the basis that the nature of her business and the changes in direction that occurred in the 2008 year, means that the business is still within a reasonable lead time before making taxable income.
Matters to be given consideration
We have attached a business plan together with income projections for the next three years which indicate that there will be a significant turnaround in profitability.
Whilst the taxpayer commenced her business in 2000, it was initially very small scale whilst the infrastructure was being developed. In the 2008 financial year, having developed the infrastructure and her skills and knowledge in the industry, a decision was made to acquire young horses of highly regarded international bloodlines, together with various embryos and semen samples from the United States (“US”) and Europe. This was to add to the horses already acquired, to develop a major breeding program and assist in the selection of the horses acquired.
We understand that the lead time for a horse breeding business is generally between 5 to 10 years, and for Arabian horses, being a more specialised breed this could extend to 15 years. We believe the taxpayer has basically reset the clock in the 2008 year, by investment of significant capital into the introduction of new stock (approximately $6.9 million) and the employment of an expert farm manager. The new horses acquired were predominantly yearlings or two year olds and would have a lead time of three to four years to become breeding stock. In the period up until the horses could be bred, they were used to show them, winning titles worldwide and promoting interest in the farm, future breeding program and saleable foals.
There has been increasing births of foals from the 2010 year up to now and also significantly increasing stud fees and semen sales, as two of the three stallions acquired in 2008….are much sought after. A summary of the progress of the farm…and the breeding over the last four years is summarised below.
On 17 May 2013, the Commissioner issued a notice of assessment to HVZZ for the income year ended 30 June 2012, disallowing HVZZ’s losses.
On 16 July 2013, the Commissioner issued HVZZ with a notice of private (binding) ruling (Authorisation number 1012488143019) (PBR) and attached “Reasons for decision”.
The Commissioner’s “Ruling”, as stated in the PBR, is as follows:
Question:
Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2011-12 to the 2016-17 financial years?
Answer:
No
The “Relevant facts and circumstances”, as set out in the PBR (Scheme), are as follows[4]:
Relevant facts and circumstances
[1.]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.
[2.]You expect that your income for non commercial loss purposes will exceed $250,000 in the 2011-12 and subsequent years. You pass three of four tests contained within Division 35 of the ITAA 1997.
[3.] You own and operate a horse breeding business and have done so since the 1999/2000 financial year,
[4.]The 2004-05 and 2005-06 income tax assessments were issued on the basis that the deductions for losses incurred for the horse breeding business were disallowed. You objected to the assessments which resulted in the objections being allowed in full as it was considered that your activities constituted the carrying on of a business.
[5.]You commenced your business in 2000 on a very small scale however in the 2007-08 financial year you decided to make an investment of significant capital to introduce new stock and employ an expert farm manager.
[6.]You have supplied a letter from an independent source that specifies that when breeding horses a profit could be expected in 10-15 years of commencement. You expect your business to make a tax profit in the 2017-18 financial year.
[4] The paragraphs of the “Relevant facts and circumstances”, as set out in the PBR, are not numbered but have been numbered in these Reasons for Decision for ease of reference.
By letter dated 9 September 2013 (and signed by Mr Shields) together with an ATO form titled “Objection form – for tax professionals”, dated 10 September 2013 (and signed by Mr Shields), HVZZ objected to the PBR (Objection). The PR Application Documents (described in paragraphs 5 and 6 above) were provided by HVZZ to the Commissioner together with the Objection.
By email dated 23 October 2013, Mr Shields informed the Commissioner that HVZZ wished to withdraw the 2011/2012 financial year from the Objection.
On 28 November 2013, the Commissioner issued HVZZ with a “Notice of objection decision” disallowing the Objection (Objection Decision).
The Objection Decision includes the following statements:
On 23 October 2013 you withdrew the objection against the 2011-12 financial year from the request as the assessment, reference 466 505 401 3712, was issued to you on 17 May 2013.
………
Please note that we will be amending the 2011-12 assessment to defer the primary production loss of $3,123,147.00, as you have applied an incorrect code (code 5 – Commissioner’s discretion) to claim the loss. The Commissioner did not exercise the discretion for the 2011-12 financial year in the [PBR]. You will receive an amended assessment in due course. …
As a consequence of HVZZ withdrawing its objection against the 2011/2012 year from the Objection, the income years relevant to this application are 2012/2013 to 2017/2018 (Relevant Years).
The “Reasons for decision”, attached to the Objection Decision (Reasons for Objection Decision), state (at 3):
Question raised and our response:
We consider that your objection raises the following question. This question and our answer are set out below:
Question:
Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your horse breeding activity in your calculation of taxable income for the 2012-13 to 2016-2017 financial years”
Answer:
No
The Reasons for Objection Decision provide the following “Summary” (at 6):
Summary of reasons for decision
The Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 because, on the facts provided the Commissioner is not satisfied that it is because of the nature of your activity that you did not receive assessable income greater than the deductions attributable to it for the 2012-13 to 2016-17 financial years.
Therefore, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future financial year any loss generated from your activity for those years. A deferred loss is not disallowed and will be deductible against any taxation profit from your activity, or similar business activity, in future years.
If your activity, or similar activity should satisfy an exception or satisfy the income requirement and one of the tests in Division 35 of the ITAA 1997 in any given year, then the whole of the deferred loss will be deductible in that year.
On 6 December 2013, the Commissioner issued HVZZ with a notice of amended assessment for the year ended 30 June 2012 (2012 Amended Assessment).
HVZZ has not yet objected against the 2012 Amended Assessment.
On 29 January 2014, HVZZ applied to the Tribunal for a review of the Objection Decision. The application was heard by the Tribunal on 29 and 30 October 2014.[5]
[5] HVZZ’s written closing submissions, in reply, were received by the Tribunal on 24 December 2014 (HVZZ’s Closing Submissions).
analysis
There are two bodies of legislation relevant to this application. The first is the legislation relating to private rulings in Division 359 of Schedule 1 to TAA. The second is the legislation relating to non-commercial business losses in Division 35 of the ITAA 1997. As will become apparent from the discussion which follows, the interplay between these two Divisions gives rise to some difficulties in this case.
Private rulings – Division 359 of Schedule 1 to the TAA
Division 359 of Schedule 1 to the TAA contains the rules relating to private rulings, with effect from 1 January 2006[6]. In summary, Division 359 applies as follows:
· The Commissioner may, on application, make a private ruling on the way in which he considers a tax law applies to a taxpayer in relation to a specified “scheme”[7] in relation to a current, future or past income year or claim period: s 359-5 and s 359-25;
· The Commissioner is required to make the ruling applied for, unless an exception applies: s359-35. As DP Frost recently commented in Bentivoglio and Commissioner of Taxation [2014] AATA 620 (Bentivoglio) at [17]:
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 the scheme is implemented by the taxpayer in a way that is materially different from the way described in the ruling, the ruling is not of practical use to the taxpayer.
[This is because, in such circumstances, the ruling is of no effect and cannot be relied on by the taxpayer.];
· A rulee dissatisfied with a private ruling may generally object against the private ruling in accordance with the normal objection procedures: s 359-60;
· The Commissioner is required under Part IVC of the TAA to consider a rulee’s objection and either allow it, in whole or in part, or disallow it;
· If the rulee is dissatisfied with the Commissioner’s decision on the objection (objection decision), the rulee may apply to the Tribunal for a review of, or appeal to the Federal Court against, the objection decision.
[6] The rules relating to private rulings were previously contained in Pt IVC of the TAA.
[7] The term “scheme” is defined broadly in s 995-1 of the ITAA 1997 to mean “(a) any *arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.”
Of particular relevance here, is the following paragraphs of the reasons for judgment of the Full Federal Court, constituted by Lockhart, Beaumont and Emmett JJ, in Commissioner of Taxation v McMahon and Another [1997] FCA 1087; (1997) 79 FCR 127 (McMahon):
· ….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…..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: Lockhart J at 133E;
· In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is “go over again” the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated in the identified facts constituting the arrangement: Comptroller-General of Customs v Akai Pty Ltd (1994) 50 ACR 511 at 521 and the cases there cited: Lockhart J at 133F;
· …..as a matter of statutory interpretation, none of the Commissioner, the Tribunal or the Court has the power to redefine the arrangement. In other words, at least as far as the Tribunal and the Court are concerned, they must take the arrangement as it was stated or defined by the applicant for the purposes of the ruling. The Tribunal and the Court cannot review or consider a different arrangement. They must take the arrangement as it comes to them: Beaumont J at 145B;
· …..on the hearing of an application to the Tribunal for review of an objection decision, the only function which the tribunal is to perform is to review the opinion of the Commissioner, as stated in the ruling, as to the way in which the relevant tax law applies to the arrangement which is the subject of the ruling. There is simply no cause for the Tribunal to investigate whether the facts and circumstances which are the subject of the ruling accord with the true facts or not….: Emmett J at 149G – 150A;
· ….the Tribunal cannot, on hearing the hearing of an application for review of a decision on an objection against a private ruling, redefined the arrangement. The Tribunal is limited to making a decision upon the basis of the arrangement, including assumptions, identified by the Commissioner in the ruing. The only question for the Tribunal is whether the Commissioner’s view as to the application of the law to the arrangement so identified was correct: that is to say, should the decision on the objection by the Taxpayer to the ruling not have been made or should it have been made differently. The only material which need be before the Tribunal would be the ruling and particulars of the person, the tax law, the year of income and the arrangement identified in the ruling pursuant to s 14ZAS(1): Emmett at 150D – E.
Similarly, in Bellinz Pty Ltd and Others v Commissioner of Taxation [1998] FCA 615; (1998) 84 FCR 154 (Bellinz), the Full Federal Court, constituted by Hill, Sundberg and Goldberg JJ, stated (at 160C-E):
It suffices to say that, where a private ruling is sought in respect of an arrangement, it is imperative that an applicant give full details to the Commissioner either in the initial application or in response to requests by the Commissioner for additional facts: s 14ZAM. The ruling itself must, inter alia, identify the arrangement to which the ruling relates: s 14ZAS(1), although it may do so by reference to matters set out in a document identified in the ruling and which, or a copy of which, is available to "the rulee”: s 14ZAS(3).
Both parties to the appeal proceeded on the basis that the arrangement the subject of the ruling, identified both in the application and the ruling itself, was described in a document which the parties prepared for the purposes of the appeal. Such an approach should not be encouraged. The Court can have regard only to the arrangement as described in the ruling itself, supplemented by any documentation referred to in it. It is not suggested here that the document prepared differed materially from the arrangement described by reference to documents in the ruling the subject of the appeal. [Emphasis added]
The reasons for judgment of the Full Court in Bellinz state that the arrangement (scheme) to which the ruling relates must be described in the ruling itself and the scheme may be described in the ruling in whole or part by reference to matters set out in a document identified or referred to in the ruling. The reasons for judgment of the Full Court in Bellinz do not authorize incorporation into a scheme description of the whole of the content of any referenced document merely by the fact that the document is identified or referred listed in the ruling. The matter to be drawn from the identified document is to be referenced in the description of the arrangement (scheme) given in the ruling. In this respect a comparison of the decisions in Commissioner of Taxation v Executors of the Estate of Subrahmanyan [2001] FCA 1836, (2001) 116 FCR 180 at 182[6] and 183[8] per Hill J; Lamont v Commissioner of Taxation (2005) 144 FCR 312 (Lamont) at 313[1] - 320[23] per Hill J and McMahon at 132 - 134 per Lockhart J, at 140 – 141 per Beaumont J and at 149G - 150E per Emmett J, is instructive.
Although the reasons for judgment of the Full Court in McMahon and Bellinz relate to the former private ruling provisions in Pt IVAA of the TAA, the reasoning remains relevant to the present regime in Division 359 of Schedule 1 to the TAA and continues to be applied with approval to the current private ruling provisions in Division 359 of Schedule 1 to the TAA 1953. See, for example, Lamont at 318-320 per Hill J; Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496 at [3] per Ryan, Gordon and Foster JJ; Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508; (2010) 79 ATR 582 (Cooperative Bulk Handling) at 587 [12], [13], [15] and [16] per Gilmour J; Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Commissioner of Taxation [2013] AATA 99 (Cooper Bros) at [35], [36], [38], [41], [42], [44], [46] and [49] per DP Alpins and The Public Servant and the Commissioner of Taxation [2014] AATA 247 (The Public Servant) at [46] to [53] per SM Lazanas.
Preliminary Issues – Attachment 1, Witness Statements & the Preston Letter
In HVZZ’s “Statement of Facts, Issues and Contentions”, dated 3 September 2014 (HVZZ’s SFIC), HVZZ contends:
4.The Applicant contends that paragraphs [3] and [4] of the Relevant Facts and Circumstances as cited above, specifically refer to the Notice of Objection Decision on Objections for the Applicant issued by the Respondent on 30 January 2009 and the attached Reasons for Decision (ATO Reference MEI/TOW/6019395) in relation to the Applicant’s 2004-05 and 2005-06 income tax assessments (referred to as “Attachment 1” and attached to this SFIC as Attachment 1).
5.Consequently, the Applicant contends that paragraphs [4] and [5] of the Relevant Facts and Circumstances read in Attachment 1 into the Scheme of the Notice of Private Ruling….
6.The Applicant contends that paragraph [5.a.] of the Relevant Facts and Circumstances (cited above) refers to the letter from renowned Arabian horse expert and Chairman of the Board of Directors for the Arabian Horse Society of Australia, Mr Alan Preston (the “Independent Expert Letter”). The Independent Expert Letter was provided by the Applicant in her Application for Private Ruling. Independent Expert Letter is included at page [71] of the T-Documents. Consequently, the Applicant contends that paragraph [5.a.] of the Relevant Facts and Circumstances reads the independent Expert Letter into the Scheme of the Notice of Private Ruling.
7.The Applicant intends to call witnesses – to provide colour, explanation and relevant background to the Scheme as contended. [Emphasis added]
In HVZZ’s SFIC, HVZZ further contends:
29.It is contended that the only plausible explanation for the detailed reference and discussion of the Notice of Decision on Objections for the Applicant issues by the Respondent on 30 January 2009 and the attached Reasons for Decision in relation to the Applicant’s 2004-05 and 2005-06 income tax assessments (ATO Reference MEI/TOW/6019395) (referred to as Attachment 1) in paragraphs [3] and [4] of the Relevant Facts and Circumstances in the Scheme, was that the Respondent was relying on the inclusion of the Notice of Objection Decision on Objection and Accompanying Reasons for Decision within the Scheme and forming part of the Scheme. In particular, the following words at paragraph [3] of the Relevant Facts and Circumstances are referred to:
You objected to the assessments which resulted in the objections being allowed in full as it was considered that your activities constituted the carrying on of a business.
30.Further, it is contended that the above quoted words in paragraph 29, taken in the context of paragraphs [3] and [4] and the closeness of words to those quoted from page 3 of Attachment 1 at paragraph 4, can only be plausibly understood as reading Attachment 1 into the Scheme. Further, it is contended that the reference to the Applicant’s activities “constituted the carrying on of a business” in a ruling application for section 35-55(1)(c) where no question of carrying on a business arises serves no other purpose
Then, at [31] of HVZZ’s SFCI, HVZZ invites the Commissioner to call the author of the PBR to refute this. According to HVZZ, the author of the PBR
31.…….would have had Attachment 1 in front of her when writing the Relevant Facts and Circumstances of the Scheme and by her choice of words in paragraphs [3] and [4] of the Relevant Facts and Circumstances, was intending to read Attachment 1 into the Scheme The Applicant places the Respondent on notice that it will ask the Tribunal to draw such an inference if the Respondent does not choose to call [the author of the PBR] as a witness before the Tribunal.
According to HVZZ (at [33] of HVZZ’s SFIC), the “scheme” in this case comprises:
a. The relevant facts and circumstances in the notice of private ruling
b. The notice of decision on objection for the applicant issued by the respondent on 30 January 2009 and the attached reasons for decision in relation to the applicant’s 2004-05 and 2005-06 income tax assessments (ATO Reference MEI/TOW/6019395) (together referred to as Attachment 1) referred to in paragraphs [3] and [4] of the Notice of Private Ruling; and
c. The Independent Expert Letter referred to in paragraph [5.a.] of the Notice of Private Ruling [i.e. the Preston Letter].
The “Attachments” to HVZZ’s SFIC comprise:
(i)the Commissioner’s objection decision, dated 30 January 2009, issued to HVZZ allowing the objection, dated 30 May 2008, HVVZ made against her assessment for years ended 30 June 2005 and 30 June 2006, issued on 12 November 2007, and the Commissioner’s “Reason for decision” for Objection Reference Number 6019395 (Attachment 1); and
(ii)an unsigned witness statement of HVZZ, dated 3 September 2014 (HVZZ Witness Statement) and an unsigned witness statement of Mr TB, dated 3 September 2014 (TB Witness Statement) (Witness Statements).
Prior to the hearing, the Commissioner raised concerns about the Commissioner’s contention that Attachment 1 should be “read in” to the Scheme and in relation to the potential tender of the Witness Statements to “provide colour, explanation and relevant background to the Scheme”, pursuant to the Commissioner’s discretion in s 359-65(1) of Schedule 1 to the TAA. However, the Commissioner conceded that it is open to the Tribunal to have regard to the Preston Letter (see paragraph 5(iii) above), as an identified documentary source of an opinion stated in the scheme by Mr Preston, namely “that when breeding horses a profit could be expected in 10-15 years of commencement..” (Preliminary Issues).
On the first day of the hearing (i.e. 29 October 2014), the Tribunal heard argument from counsel for both parties concerning the extent to which:
(i)Attachment 1 should be included in the Scheme;
(ii)the Tribunal should have regard to the Witness Statements, pursuant to s 359-65 (1) of Schedule 1 to the TAA, as “additional information” not considered by the Commissioner when making the PBR; and
(iii)the Tribunal should have regard to the Mr Preston Letter.
Unfortunately, the Preliminary Issues arise in the main as a consequence of how the Commissioner identified the Scheme in the PBR. The PR Application Documents, referred to in paragraph 5 above, could have been used by the Commissioner to formulate HVZZ’s “scheme” with far greater precision. Regrettably, this did not happen. As DP Frost aptly said recently in Bentivoglio and Commissioner of Taxation [2014] AATA 620 (Bentivoglio) at [19] and [25]:
19.Given the significance of the “scheme” both to the ruling and 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.
………
25.…...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 ruling 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.
The difficulties posed by the Commissioner’s formulation of the scheme in this case are in stark contrast to those posed by the Commissioner’s formulation of the scheme in Bentivoglio. In Bentivoglio, the Commissioner’s broad formulation of the relevant “scheme” was, as described DP Frost (at [23]), “unwieldy”. There, the scheme was described followed by the statement that the “description is based on the following documents”, comprising over 200 pages of content, which are to “form part of and are to be read with” the description: see Bentivoglio at [20]-[25]. Whereas, here the Scheme is formulated in 6 brief paragraphs (only 5 of which contain statements of fact). The Scheme in this case is the opposite of unwieldy, it is inadequate. Both of these approaches taken by the Commissioner to identifying the scheme are unhelpful and unsatisfactory.
Since May 2014, following a telephone conversation with the Tribunal’s Conference Registrar, the Commissioner has acknowledged that the Preliminary Issues in this case are in part due to how the Scheme was defined in the PBR, which is not an “adequate description” of the circumstances set out in HVZZ’s PBR application.
The Commissioner has also acknowledged criticism by the Tribunal of the way schemes have been drafted in other PBRs[8] and has attempted to resolve the problems arising from the Scheme description in this case by agreeing at an early stage to an objection to the HVZZ’s 2012 Amended Assessment taking priority so that a comprehensive independent review of the merits of the case can proceed. However, HVZZ was not open to this suggestion and resolved to proceed to hearing.
[8] Including DP Frost’s recent remarks in Bentivoglio at [19] – [30].
At the beginning of the second day of the hearing (i.e. 30 October 2104), the Tribunal delivered oral reasons on the Preliminary Issues. Relevant extracts from the Tribunal’s oral reasons on the Preliminary Issues are set out, in turn, below.
(i)Attachment 1
As to the extent to which the Tribunal can have regard to Attachment 1, the Tribunal, after a discussion of relevant earlier decisions of the Federal Court and the Tribunal, stated:
…..Whilst the Tribunal is not satisfied, based on the relevant case law, that all of Attachment 1 should be included or read into the Scheme as identified in the PBR, it is satisfied, based on the relevant case law, that it can have regard to Attachment 1 to the extent that, by reference, it reads into paragraph 4 of the Scheme "the objections being allowed in full as it was considered that your activities constituted the carrying on of a business." Applying the same reasoning, the other underlying documents, being the Applicant's Notices of Assessment for the 2005-2006 years and the document by which the Applicant made her objection against these assessments should be included in the Scheme, but only to the limited extent that they reference other statements in paragraph 4 of the Scheme. Namely, the basis on which the 2005 and 2006 assessments were issued, "that the deductions for losses incurred for the horse breeding business were disallowed" and that the objections were made.
(ii)Witness Statements
As regards the extent to which the Tribunal can have regard to the Witness Statements, the Tribunal, after a discussion of relevant earlier decisions of the Federal Court and the Tribunal, determined:
It follows, in the Tribunal's view, that s 359-65(1) of Schedule 1 to the TAA may permit the Tribunal to consider the witness statements as additional information to the extent those documents are informative, that: (i) the Applicant owns and operates a horse breeding business and has done so since the 1999-2000 financial year; and (ii) the Applicant “decided to make an investment of significant capital to introduce stock into her business in 2007-2008 and employ an expert farm manager”, but to that extent only.
(iii)Preston Letter
Finally, in respect of the Preston Letter, the Tribunal determined:
……I note that it is common ground that "the letter from an independent source" referred to in paragraph 6 of the Scheme should, based on the relevant case law, be included in this Scheme, but only to the extent that it is the identified documentary source for an opinion stated by its author, Mr Allan R. Preston, namely "that when breeding horses a profit could be expected in 10 to 15 years of commencement.
Evidence from author of PBR
In its oral reasons, delivered on 30 October 2014, the Tribunal did not address HVZZ’s contention that the Commissioner should have produced the author of the PBR as a witness in relation to her formulation of the Scheme and that the Tribunal should draw an adverse inference from the Commissioner’s failure to do so. HVZZ’s Written Submissions refer (at 35c) to the rule in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, and subsequent cases which have referred to it, in support of this contention. The Tribunal addresses this point briefly now. As stated above, the case law on private rulings requires the Tribunal to take the Scheme as it finds it. What was in the mind of the author of the PBR or what material may have been before the author of the PBR when the Scheme was formulated is irrelevant and, accordingly, the Tribunal does not draw any adverse inference from the Commissioner’s failure to call the author of the PBR as a witness. Put simply, the Tribunal is not tasked with verifying the correctness of the facts identified in the Scheme.
Non-commercial business losses - Division 35 of the ITAA 1997
Division 35 of the ITAA 1997 contains the rules relating to losses from non-commercial business activities. Section 35-10(2) of the ITAA 1997, prevents losses from a “non-commercial business activity” carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, and the losses are generally treated as deferred until the next income year in which profits from the non-commercial business activity arises, unless an exception applies.
Section 35-10(2) of the ITAA 1997 states :
35-10(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.
“Non-commercial business activities” are those that cannot satisfy one of the following exclusions in s 35-10(1)(a) to (c) of the ITAA 1997:
(i)Certain minimum threshold tests used to determine the scope of the taxpayer’s business activities are satisfied. Specifically, for the 2009/2010 and later income years, a taxpayer must have an “adjusted taxable income” of less than $250,000 (i.e. satisfy the “income requirement” in s 35-10(2E) of the ITAA 1997) and satisfy any of the following four tests – the “assessable income test” (in s 35-30), the “profits test” (in s 35-35), the “real property test” (in s 35-40) and the “other assets test” (in s 35-45)): see s 35-10(1)(a) of the ITAA 1997[9];
(ii)The Commissioner is satisfied, pursuant to an exercise of his discretion in s 35-55 of the ITAA 1997, that either special circumstances or the nature of the business activity precluded the taxpayer from satisfying any of the threshold tests in s 35-10(1)(a) of the ITAA 1997: see s 35-10(1)(b) of the ITAA 1997; or
(iii)For the purposes of s 35-10(4) of the ITAA 1997, a “primary production” or “professional arts business” activity was undertaken and the other income of the taxpayer is less than $40,000: see s 35-10(1)(c) of the ITAA 1997.
[9] As set out in paragraph 9, the Scheme as set out in the PBR, states (at [2]) that HVZZ expects that its income for the 2011/2012 and subsequent income years to exceed $250,000. As such, HVZZ cannot satisfy the “income requirement” in s 35-10(1)(a) of the ITAA 1997.
For the 2009/2010 and subsequent income years, a taxpayer must have an “adjusted taxable income” of less than $250,000 to satisfy the “income requirement” in s 35-10(2E) of the ITAA 1997. It is common ground that HVZZ does not satisfy the “income requirement” in s 35-10(2E) of the ITAA 1997 in the Relevant Years for the purposes of s 35-10(1)(a) of the ITAA 1997. This is acknowledged in the Scheme itself, where it is stated (at [2]) that HVZZ expects that its income for the 2011/2012 and subsequent income years to exceed $250,000: refer to the Scheme in paragraph 10 above. It is also common ground that s 35-10(1)(c) of the ITAA 1997 does not apply in this case.
Consequently, the only way in which the non-commercial loss deferral rule in s 35-10(2) of the ITAA 1997 will not apply to HVZZ’s business activity in the Relevant Years is if the Commissioner exercises his discretion in s 35-55 of the ITAA to HVZZ’s business activity in the Relevant Years for the purposes of s 35-10(1)(b) of the ITAA 1997. The practical effect of the Commissioner exercising his discretion in s 35-55(1) of the ITAA 1997 in HVZZ’s case in relation to the Relevant Years, is that HVZZ can access her non-commercial business losses in the income year in which they are incurred, instead of having to wait until her horse breeding “business activity” generates profits to claim the losses.[10]
[10] The Commissioner has issued public ruling TR 2007/6, titled “Income tax: non-commercial business losses: Commissioner’s discretion”, to provide guidance on how his discretion in s 35-55(1) of the ITAA 1997 may be exercised “to determine that it would be unreasonable for the loss deferral rule in subsection 35-10(2) to apply to a loss attributable to an individual taxpayer’s *business activity.” For present purposes, it is unnecessary to elaborate on the content of TR 2007/6.
Of particular relevance here, is the Commissioner’s discretion in s 35-55(1)(c) of the ITAA 1997 which provides that the Commissioner “may”, on the application of an individual[11], decide that the non-commercial loss deferral rule in s 35-10(2) of the ITAA 1997 does not apply to a business activity for one or more income years (excluded years), if the “Commissioner is satisfied that it would be unreasonable to apply that rule” because:
(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)). [Emphasis added]
[11] Section 35-55(3) of the ITAA 1997 states that an application for a decision by the Commissioner under s 35-55 must be made in the “approved form”. Section 388-50 of Schedule 1 to the TAA provides that the “approved form” is a private ruling application.
In HVZZ 1761 of 2011 and Commissioner of Taxation [2011] AATA 779 (HVZZ 1761 of 2011), Logan J, Dr McPherson, DP and SM McCabe stated (at [27]) that, for the purposes of s 35-55(1)(c)(ii) of the ITAA 1997, the “commercially viable period” runs from when the relevant “business activity” commences.
In summary, HVZZ contends[12] that the Commissioner should have exercised his discretion in s 35-55(1)(c) of the ITAA to allow HVZZ to apply her non-commercial business losses in each of the Relevant Years (i.e. 2013 through 2018), having regard to the following:
· HVZZ commenced a new “business activity” for the purposes of s 33-55(1)(c) of the ITAA 1997 from the 2007/2008 year onwards, such that the “commercially viable” period runs from the 2007/2008 financial year (i.e. rather than from the 1999/2000 financial year),[13] having regard to:
(i)the commencement of a breeding program;
(ii)the hiring of a farm manager;
(iii)the significant capital investment; and
(iv)other details referred to in the Scheme;
· HVZZ’s “business activity”, because of its nature, has not produced and will not produce assessable income greater than the deductions attributable to it in each of the Relevant Years (i.e. for the purposes of s 35-55(1)(c)(i) of the ITAA 1997); and
· There is an “objective expectation”, based on evidence from independent sources that within the “commercially viable” period of the industry concerned HVZZ’s business activity will produce assessable income for an income year greater than the deductions attributable to it for that year (i.e. for the purposes of s 35-55(1)(c)(ii) of the ITAA 1997.
[12] See, for example, HVZZ’s SFIC at [25], [26], [39] and [50].
[13] The Tribunal notes that HVZZ’s SFIC refers to as a new business activity having been commenced by HVZZ in the 2005/2006 year onwards: see, for example, [20], [21], [26], [39] and [50]. However, HVZZ’s Written Submissions, dated 19 November 2014 (HVZZ’s Written Submissions,) and “Written Submissions in Reply”, dated 24 December 2014 (HVZZ’s Reply Submissions), HVZZ refers to a new business activity as having been commenced by HVZZ in the 2007/2008 year onwards (i.e. instead of in the 2005/2006 year onwards, as stated in HVZZ’s SFIC): see, for example, HVZZ’s Written Submissions at [4.a.], [65], [66], [73], p 43, p 45, p 46, [84], [85] and [90] and HVZZ’s Reply Submissions at [6], [7], [8], [9], [10], [16], [24], [38.d.] and [41.a.]. The Tribunal is satisfied based on all of the material before it that references in HVZZ’s SFIC to a new business activity having been commenced by HVZZ in the 2005/2006 year onwards were made by HVZZ in error and that HVZZ’s intention is that HVZZ”s SFIC should instead refer to a new business activity having been commenced by HVZZ in the 2007/2008 year onwards, as per HVZZ’s Written Submissions and HVZZ’s Reply Submissions.
In contrast, the Commissioner’s position is that on the Scheme, as identified by the Commissioner in the PBR, the Commissioner correctly decided not to exercise the discretion in s 35-55(1)(c) of the ITAA 1997 thereby not allowing the HVZZ to offset any losses from her horse breeding business activity against other income in calculating her taxable income for each of the Relevant Years. As such, the Commissioner asserts that the Commissioner’s opinion on the PR Application (and the Objection Decision) is correct.
Additional information – s 359-65 of Schedule 1 to the TAA
When considering whether to allow an objection against a private ruling under Pt IVC of the TAA, s 359-65(1) of Schedule 1 to the TAA allows the Commissioner to consider “additional information” he or she did not originally consider when making the ruling, provided the “additional information” is not such that the “scheme” to which the ruling application related is not “materially different” from the “scheme” to which the ruling relates” s 359-65(3) of Schedule 1 to the TAA.
The expression “materially different” is not defined for the purposes of s 359-65 of Schedule 1 to the TAA. In Cooper Bros, DP Alpins made the observations regarding the meaning of “materially different” in the context of s 359-65 of Schedule 1 to the TAA:
36.As I have explained, in this proceeding the Tribunal is concerned with the correctness of the Commissioner’s opinion expressed in the ruling in issue. It remains the case under Div 359 that the Tribunal is confined by the scheme specified in the ruling (Hastie Group Ltd v Commissioner of Taxation at [3]; Cooperative Bulk Handling at [16]). Accordingly, in my view the Tribunal may only consider additional material pursuant to s 359-65(1) to the extent that it bears upon the correctness of the ruling in issue.
37.In my view, the terms of s 359-65(3) confirm that this is so. The additional information which may be considered pursuant to s 359-65(1) is necessarily confined to the terms of that subsection…….
38.In my view, the word “materially” in s 359-65(3) cannot properly be read as permitting additional information to be considered by the Commissioner or the Tribunal pursuant to s 359-65(1) so as to interfere with the description of the scheme in the ruling in any way. [Emphasis added]
Paragraphs 9 to 37 of HVZZ’s Written Submissions seek to draw “additional information” from a number of sources (including from the PR Application Documents (and, in particular, the Shields Letter), Attachment 1, the Witness Statements and the Preston Letter) to support HVZZ’s argument that the discretion in s 35-55(1)(c) of the ITAA 1997 should have been applied by the Commissioner in the PBR.
Paragraphs 9 to 37 of HVZZ’s Written Submissions include the following:
15.As noted above, the applicant says that the main issue before the Tribunal is whether the Applicant’s current “business activity commenced in the 2007-08 financial year (the “Main Substantive Issue”).
16.The Applicant says that the Tribunal, in ruling upon the Main Substantive Issue may have regard to the Scheme as is permissibly explained by “material that is informative about the facts comprising the Scheme as it has been described in the ruling”.
Discrete facts contained within paragraph [5] of the Scheme
17.When broken down into discrete factual “items” relevant to the Main Substantive Issue, the Applicant says paragraph [5] sets out six key facts relevant to the substantive question:
a.That the Applicant “commenced” her business “in 2000” (denoted as fact F5-A);
b.That the Applicant’s business when commenced “was on a very small scale” (denoted F5-B); the Scheme is ambiguous as to the meaning of “was on a very small scale” and the Applicant submits that extrinsic material will assist in explaining what this means; and
c.Significant changes were made in the “2007-08 financial year” (denoted F5-C) as set out in the subsequent three points.
i.First, that the Applicant in the “2007-08 financial year” decided to make an “investment of significant capital” (denoted F5-D); the scheme is ambiguous as to the meaning of “investment of significant capital”; in particular what that “significant capital is” and the Applicant submits that extrinsic material will assist in explaining what this means;
ii.Second, the “introduce[d] new stock” (denoted F5-E); the Scheme is ambiguous as to the meaning of “introduce[d] new stock”; noting that “introduce new stock” causes the question “what kind of new stock” and the term “introduce new stock” can mean different things in primary production contexts, and the Applicant submits that extrinsic material will assist in explaining this; and
iii.Third, that the Applicant in the “2007-08” financial year” “employ[ed] an expert farm manager” (denoted F5-F); the Scheme is ambiguous as to the meaning of “employ[ed] an expert farm manager”, in particular what his “expertise” was (particularly given that the Applicant had been in business since 2000 without an expert farm manager) and the Applicant submits that extrinsic material will assist in explaining this.
……….
Application letter
23.Pertaining to the Application Letter the Applicant says that the following passages are “material that is informative about the facts comprising the Scheme as it has been described in the ruling”:
[TABLE]
……..
25.Expressed, in other words, the Applicant asks the Tribunal to draw an inference that the paragraph quoted in item 23.3 from the Application Letter has been summarised in paragraph [5] of the Scheme and in this respect notes that the Applicant (sic) [Respondent] did not call the author of the Notice of Private Binding Ruling to refute such an inference.
26Similarly, the paragraph quoted at item 23.3 provides necessary detail on what an “investment of significant capital” means (the introduction of new stock of approximately $6.9 million) and so in the Applicant’s submission, is “material that is informative about the facts comprising the Scheme as it has been described in the ruling”.
27.When the paragraphs quoted at items 23.3 and 23.3 are considered together it was clear that the author of the Application Letter, the late Mr Kevin Shields, was asking the Respondent to find that the business activity commenced from 2008 onwards as a result of the significant change in the business.
Attachment 1
31.Pertaining to Attachment 1, the Applicant says that the following passages are “material that is informative about the facts comprising the Scheme as it has been described in the ruling”:
[TABLE]
……..
35. ……..
b.…….Consequently, the Applicant says that to the extent there are ambiguous terms used in the Scheme (made highly likely in any section 35-55(1)(c) application, as the section requires intimate consideration of the Applicant’s particular business), then the Tribunal can and should use its powers given to it by the legislature in section 359-65(1) to address ambiguities in the Scheme;
c.The Applicant says the use of the power [i.e. in s 359-65(1) of Schedule 1 to the TAA] involves referring to material that explains the Scheme including the relevant paragraph identified above prom the Application Letter referred to above (see item 23.2), which was subsequently summarised in paragraph [5] of the Scheme……
d.It is submitted by the Applicant that the “limiter” on consideration of “material that is informative about the facts comprising the Scheme as it has been described in the ruling” is that the material must not be “materially different”. It is noted that the TAA provides little assistance as to what “materially different means…
……..
f.Having regard to all of the above, the Applicant says that the power given to the Tribunal in section 359-65(1) should be used to the fullest extent possible allowed by the law to enable the Tribunal to remedy the ambiguities within the Scheme and, as such, “material that is informative about the facts comprising the Scheme as it has been described in the ruling” should be taken into account to understand each individual element of paragraph [5] of the Scheme in the context of the Applicant’s business activities of horse breeding (see paragraph [3] of the Scheme).
Summary as to the Applicant’s setting out of the Scheme as explained
36. The Applicant, by way of summary, sets out the Scheme, as explained, as follows:
[TABLE]
37.For completeness, the Applicant submits……..that nothing in the above summary amounts to consideration of material that is “material different”. [Emphasis added]
There was no equivalent provision to s 359-65(1) of Schedule 1 to the TAA in the former provisions relating to private rulings in Pt IVC of the TAA. Further, there is presently no Federal Court authority on s 359-65(1) of Schedule 1 to the TAA. Therefore, in deciding what it may permissibly do with the information which HVZZ now urges the Tribunal to use, the Tribunal must be guided by recent decisions of the Tribunal as to the acceptable use of “additional information” under s 359-65(1) of Schedule 1 to the TAA.
As stated above, in deciding whether the Commissioner’s application of the law to the identified “scheme” is correct, McMahon and Bellinz permit the Tribunal to consider that part of a document where a matter is identified as part of the scheme or arrangement ruled upon by reference to that part of the document. Consistent with the principle in Bellinz, and founded on what the Tribunal considers it may be permitted to do under s 359-65(1), the Tribunal in Cooper Brothers stated that s 359-65(1) of Schedule 1 to the TAA permits the Tribunal to consider only “additional material” that is informative about the facts comprising the scheme as it has been described in the ruling. Section 359-65(1) does not permit the Tribunal to redefine the scheme: see Cooper Bros at [22] to [49], particularly [35], [36], [38], [41], [42], [44], [46] and [49] per DP Alpins and The Public Servant at [46] to [53] per SM Lazanas.
Recently, in Bentivoglio DP Frost made the following comment in relation to the application of s 359-65 of Schedule 1 to the TAA:
59.At objection, the taxpayer provided, among other things, a further report from Professor Spooner-Hart, dated September 2012, which included the following:
……….
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. [Emphasis added]
Here, the Scheme as identified by the Commissioner in the PBR confines the Tribunal to the examination under s 359-65 of Schedule 1 to the TAA of “additional material” that the Commissioner did not consider when making the ruling and that is informative about the facts identified in paragraphs 2 to 6 of the Scheme: refer to the Scheme set out in paragraph 10 above.
For example, s 359-65(1) of Schedule 1 to the TAA may permit the Tribunal to consider the Witness Statements [Exhibit A2 and Exhibit A3] as “additional information” to the extent those documents are informative that HVZZ’s business is a horse breeding business commenced and operated by the HVZZ since the 1999/2000 financial year and that in the 2007/2008 year HVZZ decided to make an investment of significant capital to introduce new stock into her business and employ an expert farm manager. However, the Tribunal is not permitted to use information in the Witness Statements that new stock acquired by HVZZ included expensive international Arabian horse bloodstock and there has been breeding and international marketing from that stock. This is because the nature of the stock acquired, the amount invested in purchasing it, the operations of breeding and marketing from that stock and the expertise of the farm manager relevant to those matters are not facts identified in the Scheme.
As submitted by the Commissioner, paragraphs 9 to 37 of HVZZ’s Written Submissions (part of which are set out in paragraph 55 above) seek to draw additional information from a number of sources in an attempt to have the Tribunal recast the Scheme (and, in particular, paragraph [5] of the Scheme) to support the contention that the Commissioner should have exercised his discretion in s 35-55(1)(c) of the ITAA 1997 in HVZZ’s case. By the use of the documents referred to in paragraphs 9 to 37 of the HVZZ’s Written Submissions (and elsewhere in HVZZ’s Written Submissions), HVZZ seeks to set up a detailed narrative of the HVZZ’s underlying business operations over time against the concise facts identified in paragraphs [2] to [6] of the Scheme (see paragraph 10 above) to describe the arrangements ruled upon and effectively recast the Scheme to establish that the Commissioner’s opinion on the PR Application is incorrect and he should have exercised his discretion in s 35-55(1)(c) of the ITAA 1997.
As the Tribunal is only permitted to review the correctness of the PBR premised on the Scheme, HVZZ’s contention that the Tribunal should have regard to documents to describe a “business activity” commenced in the 2007/2008 financial year is, as submitted by the Commissioner, impermissible as it travels beyond the facts identified in the Scheme. Contrary to the HVZZ’s assertion (at paragraph 37 of HVZZ’s Written Submissions) that none of the “additional material” HVZZ asks the Tribunal to consider amounts to material that is “materially different”, the Tribunal takes the view that HVZZ is attempting to materially alter the Scheme. It is an attempt to have the Tribunal concern itself with whether another ruling based on different facts should have been made and not whether the PBR is correct, which is the Tribunal’s task. As already stated, the Tribunal is not permitted to investigate the facts and make findings of fact recasting the Scheme: Cooper Bros at [40].
The Tribunal’s jurisdiction in the review of the Commissioner’s ruling on the Scheme does not permit the Tribunal to:
· remedy alleged “ambiguities” in the Scheme (as HVZZ contends in paragraphs 34 and 35b and 35f of HVZZ’s Written Submissions;
· adopt facts (as HVZZ suggests in paragraphs 118 and 121 of HVZZ’s Written Submissions);
· provide opinion on what decision the Tribunal might reach if the Scheme was described differently (as HVZZ invites it to do in paragraphs 87 to 90 of HVZZ’s Written Submissions);
· state what the outcome might be if an objection was pursued against a related assessment (as HVZZ submits in paragraphs 87 to 90 of HVZZ’s Written Submissions);
· supplement the Scheme with knowledge and facts drawn from other cases (as HVZZ contends in paragraphs 21b, 34, 86 and 87 of HVZZ’s Written Submissions); and
· interpret the Scheme “such that it is effective” and by “presuming the Commissioner of Taxation drafted the Scheme with sufficient detail to rule upon the question” (as HVZZ suggests in paragraphs 21b, 34, 86 and 87 of HVZZ’s Written Submissions).
Attachment 1
More specifically, the Tribunal can only have regard to Attachment 1 to the extent that, by reference, it reads into paragraph 4 of the Scheme “the objections being allowed in full as it was considered that your activities constituted the carrying on of a business.” The Tribunal should not have regard to Attachment 1 for the purposes of any other paragraph of the Scheme.
Further, as the Tribunal ruled on 30 October 2014, the HVZZ's Notices of Assessment for the 2004/2005 and 2005/2006 years and the document by which the HVZZ made her objection against these assessments are included in the Scheme to the limited extent that they reference statements made in paragraph 4 of the Scheme broadly describing that assessments were made disallowing horse breeding business losses incurred in 2005 and 2006 and the assessments were objected to.
Paragraph 4 and the other paragraphs of the Scheme do not, as the Commissioner contended, identify any particular and further facts of the arrangement ruled upon in the PBR by reference to the HVZZ’s notices of assessment for the 2004/2005 and 2005/2006 years, the document by which the HVZZ made her objection against these assessments and Attachment 1. There is no “detailed reference and discussion” of Attachment 1 in the Scheme (as HVZZ asserts in HVZZ’s SFIC at [5], [29] and [30]). There is nothing in any paragraph of the Scheme setting out content from Attachment 1 by reference to that document or any part of that document.
HVZZ’s private ruling application does not incorporate Attachment 1 by reference, and Attachment 1 was not provided to the Commissioner with the PR Application Documents. In the PR Application Documents, the first page of the Shields Letter mentions the events described in paragraph 4 of the Scheme as “Background”. However, there is no express reference to Attachment 1 in any of the documents that comprise HVZZ’s private ruling application, including, importantly, the specified “Matters to be given consideration”: refer to the Shields Letter in paragraph 6 above. Under that heading, the focus is on describing the scaling up of the HVZZ’s existing horse breeding business in the 2008 year by the investment of significant capital to introduce new stock and employ an expert farm manager.
Witness Statements
Following the delivery of its oral reasons on the Preliminary Issues at the hearing on 30 October 2014, the Tribunal adjourned to enable the parties to review the Witness Statements (which were tendered as Exhibit A2 (being the HVZZ Witness Statement) and Exhibit A3 (being the TB Witness Statement)) and decide what they consider the Tribunal should have regard to as “additional material” that is informative about the facts comprising the Scheme pursuant to s 359-65(1) of Schedule 1 to the TAA (i.e. based on the determination given by the Tribunal in its oral reasons).
In summary, the Commissioner’s position is that the Tribunal should not have regard to text in the Witness Statements which has been: (i) underlined and highlighted in yellow; or (ii) struck through[14], as that text extends beyond the Scheme described in the PBR and what is permitted by authority and the Tribunal’s ruling given on 30 October 2014. In contrast, HVZZ contends that the Tribunal should have regard to this text. It follows that both the parties agree that the Tribunal can have regard to the text in the Witness Statements (Exhibit A2 and Exhibit A3) which is not underlined and highlighted in yellow or struck through as “additional information”, pursuant to s 359-65(1) of Schedule 1 to the TAA.
[14] This extends to the following two headings in the HVZZ Witness Statement (i.e. Exhibit A2): (i) “Commencement of breeding international bloodline Arabian horses”; and (ii) “Change in customer base”.
Based on relevant case authority discussed and reasons given above and the Tribunal’s own ruling on 30 October 2014 (in so far as it related to the Witness Statements), the Tribunal agrees with the Commissioner that the Tribunal should not have regard to the text in the Witness Statements which is underlined and highlighted in yellow or struck through.
PR Application Documents
None of the PR Application Documents are expressly referenced in the Scheme. While words and phrases used in the extract of the Shields Letter (refer to paragraph 6 above) may be the source for some of the content in the paragraphs of the Scheme that is merely speculative since none of the text in the Scheme is expressly referenced by the PR Application Documents.
New “business activity” from 2007/2008 onwards
The Scheme does not set out matters of fact and conclusion that the HVZZ commenced a new “business activity” in the 2007/2008 financial year.
Paragraph 5 of the Scheme describes the primary facts of the relevant arrangement put to the Commissioner in the PR Application, that is, the scaling up of the horse breeding business from 2008 by introducing new stock and the employment of an expert farm manager.
There is no fact in the Scheme stating a new business activity commenced in the 2007/2008 financial year. Therefore, the question simply does not arise on the Scheme identified in the PBR. That is, the Scheme does not describe a “business activity” that is new and distinguishable from the 2007/2008 financial year “business activity”. From 2000 to 2018 the HVZZ's “business activity” is described as “horse breeding” with a decision in 2007/2008 to make an investment of significant capital to introduce new stock and employ an expert farm manager: Scheme at [5].
In HVZZ’s Written Submissions (at [38] to [83]) and HVZZ’s Reply Submissions (at [4] to [16]) HVZZ notes, inter alia, that Division 35 of the ITAA 1997 intentionally uses the expression “business activity”, instead of simply the term “business”, and that the expression “business activity” is not defined for the purposes of Division 35 of the ITAA 1997, whereas the term “business” is defined broadly in s 995-1 of the ITAA 1997 to include “any profession, trade, employment, vocation or calling, but does not include occupation as an employee”. It follows, HVZZ asserts, that the threshold for changes in a “business activity” which give rise to a new “business activity” should be less than the threshold for changes in a ‘business” which amount to a new “business”. In support of HVZZ’s contention that, as a result of: (i) an investment of significant capital; (ii) the introduction of new stock (i.e. international bloodline Arabian horses); and (iii) the employment of an expert farm manager, HVZZ has a “new discrete business activity” from the 2007/2008 financial year, HVZZ refers, among other things, to the legislative history to Division 35 of the ITAA 1997 and, specifically, to paragraph 1.19 of the Explanatory Memorandum to the New Business Tax System (Integrity Measures) Bill 2000[15], which provides that if a “business activity” is not part of another “business activity” it should be viewed in isolation and treated as a separate or discrete “business activity” and whether or not an activity is simply part of particular business activity, or a separate business activity in its own right, will depend on the circumstances of each case. Based on the brief Scheme identified in the PBR (as HVZZ contends to which the Tribunal is confined in its review function), it cannot be concluded that HVZZ commenced a new or discrete “business activity” in the 2007/2008 year. In such circumstances, it is unnecessary for the Tribunal to speculate upon what the legislature intended the undefined expression “business activity” to mean for the purposes of Division 35 of the ITAA 1997, in contrast to the defined term “business”, in light of the legislative history of Division 35 and relevant case law.
[15] The New Business Tax System (Integrity Measures) Bill 2000 was ultimately enacted as the New Business Tax System (Integrity Measures) Act 2000, which Act inserted Div 35 into the ITAA 1997.
As discussed above, relevant case law has determined that the Tribunal must take the Scheme as it finds it and cannot travel beyond the facts identified in the PBR. Accordingly the information the HVZZ asks the Tribunal to have regard to and draw facts of the kind described by HVZZ at paragraphs 20, 21, 26 and 39 of HVZZ’s SFIC and paragraphs 36 and 84 to 86 of the HVZZ’s Written Submissions, to arrive at the conclusion that the HVZZ commenced a new “business activity” in the 2007/2008 financial year, such that HVZZ’s commercially viable period does not commence to run for the purposes of s 35-55(1)(c) of the ITAA 1997 until the 2007/2008 year (instead of from the 1999/2000 year) would amount to the Tribunal impermissibly recasting the Scheme and ruling on a different “scheme” than the one ruled upon and at issue.
“Nature” of HVZZ’s “business activity”
The Scheme does not, as the Commissioner submits, show why and how it is in the nature of the HVZZ's “business activity” that it will take a significant number of years from business commencement to produce assessable income greater than deductions attributable to it, as required by s 35-55(1)(c)(i) of the ITAA 1997. The Scheme lacks sufficient details to be satisfied on this point.
“Objective expectation” of tax profit & “commercially viable period” for the industry concerned
The Scheme does not set out matters of fact and conclusion that there is an “objective expectation” of when any new business activity in the 2007/2008 financial year will produce assessable income for an income year greater than the deductions attributable to it for that year based on independent evidence of commercial viability for the industry concerned as required by s 35-55(1)(c) of the ITAA 1997.
The Scheme does not describe a basis for “objectively” expecting that by the income year ended 30 June 2018 HVZZ's business activity will produce assessable income greater than the attributable deductions, as required by s 35-55(1)(c)(ii) of the ITAA 1997. The Scheme states that "[HVZZ] expects to make a tax profit in the 2017-18 financial year". This expectation of when a tax profit may be made by HVZZ, is a statement referenced in the Scheme only to the expectation of HVZZ herself and, as such, cannot satisfy the statutory requirement of being an “objective” expectation.
The last sentence of paragraph 6 of the Scheme describes the fact that it is the HVZZ’s expectation that she will make a tax profit from her horse breeding business in the 2017/2018 financial year. This is not, as HVZZ contends in paragraphs 110, 118, 119 and 121 of HVZZ’s Written Submissions, a statement of “objective” fact that the HVZZ’s horse breeding business will be profitable in the year ended 30 June 2018.
The expectation of profit does not suffice as an “objective” expectation for the purposes of s 35-55(1)(c) of the ITAA 1997 as to when the arrangement as described in the Scheme will produce assessable income for an income year greater than the deductions attributable to it for that year based on independent evidence of commercial viability for the industry concerned.
The Scheme states (at [6]) that the independent source specified a profit expectation in 10-15 years of commencement of a horse breeding business. HVZZ's business commenced in the 1999/2000 financial year and the HVZZ's expectation is that she will make a profit in the 2017/2018 financial year, which is 3 years outside the commencement of the commercially viable period stated in the Scheme. As stated above, for the purposes of s 35-55(1)(c) of the ITAA 1997 time runs from the commencement of the “business activity”: HVZZ 1761 of 2011at [27].
To reiterate, it is the role of the Tribunal to determine whether the Commissioner has applied the law correctly to the facts as stated in the Scheme. When making this determination the Tribunal does not make findings of fact and cannot consider evidence or “additional material” which would establish, as a fact of the Scheme, that the HVZZ’s business will be profitable in the year ended 30 June 2018.
The matter referenced in the Scheme from the independent source letter (i.e. the Preston Letter) addresses the financial viability “for most if not all horse breeding businesses”. The Preston Letter does not address a new business activity (as described by the HVZZ at paragraphs 20, 21, 26 and 39 of HVZZ’s SFIC) or a new business activity commenced in the 2007/2008 financial year. Nor is it clear from the Preston Letter that he is qualified to assess the commercial viability of a business activity (as described in paragraphs 20 and 39 of HVZZ’s SFIC) as including a “switch to the International bloodline Arabian horses, the commencement of an international marketing program, the commencement of a breeding program.” Further the Preston Letter does not demonstrate that there was an “objective expectation” that HVZZ’s business activity will produce assessable income for an income year greater than the deductions attributable to it for that year as required by s 35-55(1)(c)(ii) of the ITAA 1997.
The first sentence of paragraph 6 of the Scheme details an opinion of Mr Preston that is relevant in assessing whether the objective expectation required by s 35-55(1)(c)(ii) of the ITAA 1997 exists. That is, whether there is an objective expectation as to when the arrangement as described in the Scheme will produce assessable income for an income year greater than the deductions attributable to it for that year within a period that is commercially viable for the industry concerned. However, it cannot be said that the first sentence of paragraph 6 of the Scheme describes a matter from an identified document that is relevant to the application of s 35-55(1)(c) of the ITAA 1997 to a new “business activity” commenced by HVZZ in the 2007/2008 financial year. Accordingly, the use of the Preston Letter as an independent source to draw facts and conclusions of the kind described by the HVZZ (at paragraphs 22 and 24 of HVZZ’s SFIC and paragraphs 36 and 84 to 86 of the HVZZ’s Written Submissions), would also amount to the Tribunal impermissibly recasting, or materially changing, the Scheme.
CONCLUSION
For the above reasons, the Tribunal concludes:
· the Scheme, as identified by the Commissioner in the PBR, does not include a new “business activity” which was commenced by HVZZ in the 2007/2008 financial year;
· the Scheme, as identified by the Commissioner in the PBR, does not include any “objective expectation”, based on evidence from an appropriately qualified independent source, as to when a business activity which commenced in the 2007/2008 financial year will produce assessable income for an income year greater than the deductions attributable to it for that year as required by s 35-55(1)(c) of the ITAA 1997;
· HVZZ has not satisfied the Tribunal that the Commissioner’s opinion on the application of s 35-55(1)(c) of the ITAA 1997 to the Scheme is incorrect; and
· that the Commissioner’s ruling on the Scheme, as identified by the Commissioner in the PBR, is correct.
Decision
For the above reasons, the Tribunal affirms the Objection Decision.
I certify that the preceding 87 (eighty seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member CR Walsh …(Sgd) A Tran…………………………………..
Associate
Dated 5 March 2015
Dates of hearing
Date final submissions received
29 & 30 October 2014
24 December 2014
Counsel for the Applicant
Representative for the Applicant
Mr J W Fickling
Ms D Velevski
Counsel for the Respondent Ms L B Price
Representative for the Respondent Ms F Beckett-Cooper
Australian Taxation Office
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