The Taxpayer and Commissioner of Taxation
[2012] AATA 695
•21 September 2012
[2012] AATA 695
Division TAXATION APPEALS DIVISION File Number
2011/5509
Re
The Taxpayer
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 21 September 2012 Place Brisbane The decision under review is affirmed.
...........................[Sgd]...............................
Senior Member Bernard J McCabe
CATCHWORDS
TAXATION – private rulings – deferral of losses from a primary production business – whether a private ruling exists – whether the taxpayer’s business activities should be considered separately – admissibility of additional facts – impermissible to alter the factual background of commissioners ruling – decision affirmed.
LEGISLATION
Income Tax Assessment Act 1997 (Cth) ss 35-10, 35-55
Taxation Administration Act 1953 (Cth) ss 359-5, 359-60, 359-65
CASES
Commissioner of Taxation v McMahon (1997) 79 FCR 127
Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779
Commissioner of Taxation v Eskandari (2004) 134 FCR 569
Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1988) 20 FCR 288REASONS FOR DECISION
Senior Member Bernard J McCabe
21 September 2012
The taxpayer derives most of his income from his work as a professional person. He makes in excess of $250,000 each year in fees from his practice. He also breeds cattle, although that activity has resulted in significant losses over time. The taxpayer ultimately wants to offset losses from his breeding activities against his other income. He has been able to do that in the past, but new rules have been enacted that limit the taxpayer’s freedom to continue doing so in the 2009-2010 financial year. He sought a determination from the Commissioner that the power in s 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to waive the rule in s 35-10(2) (which required the deferral of losses from primary production activities carried on in these circumstances) should be exercised so the taxpayer could access the losses from the breeding activities in the 2009-2010 financial year. The Commissioner refused to make the determination.
The taxpayer asked the Tribunal to reconsider the objection decision. He says a proper view of the evidence (including evidence contained in statements from people familiar with the farming activities as well as oral evidence given by the taxpayer in person at the hearing) suggests the Commissioner should have made the determination. But a preliminary issue has arisen: the Commissioner says his decision on this matter was made in the form of a private ruling, and it is impossible for the Tribunal to change or elaborate upon the factual basis of the ruling. The Commissioner has objected to the admission of additional evidence from the taxpayer that might support his argument that the rule in s 35-10(2) be waived.
It turns out this case is at least partly about rulings. I will deal firstly with the taxpayer’s argument that the Commissioner should not have made his decision in the form of a ruling. I will then go on to consider the implications for the taxpayer of treating the decision as a ruling.
WAS THERE A RULING IN THIS CASE?
The legislation does not expressly require that the determination sought in this case be made in the form of a ruling. The legislation merely provides the Commissioner shall specify the form a taxpayer must use in order to make an application. As it happens, the Commissioner specified taxpayers should use the form applicable to a request for a ruling. The taxpayer’s representatives complied. There were three applications for a private ruling, although only the last of them is before the Tribunal on this occasion.
The taxpayer has invited me to disregard the fact everyone has, until now, proceeded on the basis he made an application for a private ruling. He argues his original application to the Commissioner may have utilised the specified forms and been discussed on the basis it was an application for a private ruling but it was in substance an application seeking review of a failure to make a decision in the taxpayer’s favour under s 35-55(1). The taxpayer says he wanted the Commissioner to use the power in s 35-55(1) to waive the rule in s 35-10, and the Commissioner’s refusal to do so is, once confirmed on objection, the proper subject of an appeal to the Tribunal. If the taxpayer is right, he does not need to grapple with cases like Commissioner of Taxation v McMahon (1997) 79 FCR 127 which limit the scope of the Tribunal’s review in relation to private ruling applications.
The Commissioner says there is a good reason for utilising the rulings’ procedure in this sort of case. His statement of facts, issues and contentions points out (at [43]) “there is no provision that specifically entitles the [taxpayer] to object to the way in which the Commissioner exercises the discretion [under s 35-55(1)]”. In those circumstances, the argument continues, Part IVC of the Taxation Administration Act 1953 – which sets out the objection process – is not engaged. That means there is no specific mechanism for getting the matter before the Tribunal. The Commissioner says treating the question as an application for a private ruling gets around the problem because sub-section 359-60 of Schedule 1 to the Administration Act permits taxpayers to object to a private ruling.
I am unable to fault the Commissioner’s reasoning. The taxpayer did not demonstrate how the Tribunal might have jurisdiction to deal with the matter if it was not an objection to a private ruling. Given everyone has been proceeding until now on the basis that there was a private ruling, there is no reason to doubt that is what it is.
THE RULES ABOUT RULINGS
The private rulings’ regime allows a taxpayer to ask the Commissioner to give an opinion as to how the tax laws will apply to a specified scheme: s 359-5, Schedule 1 to the Administration Act. The rulings’ system is intended to allow taxpayers to learn where they stand in relation to a scheme. It is therefore essential to clearly identify the facts, circumstances and (where appropriate) assumptions upon which the Commissioner is to make his ruling.
The taxpayer typically puts a fact scenario to the Commissioner to consider in the course of the taxpayer’s application for a ruling. The Commissioner can seek additional information or make assumptions that are identified. He can also decline to make the ruling.
If the Commissioner makes the ruling, the details of the scheme must be set out in the body of the ruling. If the taxpayer is dissatisfied with the ruling (or if the Commissioner declines to make the ruling), the taxpayer can object. During the course of the objection process, additional information can be considered and taken into account provided the new information does not disclose a scheme that is materially different to the one that was the subject of the ruling: s 359-65. The objection decision may be reviewed by the Federal Court or the Tribunal. But the review must proceed on the basis of the scheme identified by the Commissioner in the ruling. The Tribunal may not redefine the scheme by adducing additional fresh evidence: see McMahon (supra); see also Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779 at [5] per Logan J, Deputy President McPherson and Senior Member McCabe. The Tribunal is merely “going over” the Commissioner’s reasoning with respect to the identified scheme.
ARGUMENTS ABOUT THE ADMISSION OF THE FRESH EVIDENCE
Dr Schulte, who appeared for the Commissioner, said there is no scope for the Tribunal to receive evidence from the taxpayer and his other witnesses given the strictly limited nature of the review. He objected to the tender of the evidence on that basis. The material was provisionally admitted on the understanding I would make a decision about admissibility.
The taxpayer suggests an answer to the Commissioner’s contention. Mr Harrison QC, who appeared on the taxpayer’s behalf, said there was no dispute over the factual basis of the ruling: he says the facts on which the taxpayer wishes to rely are set out in the body of the ruling. The taxpayer says the Commissioner has approached those facts incorrectly. He says, in effect, it is open to the Tribunal on review to receive evidence that would enable me to see the scheme in its proper light.
Mr Harrison was referring in particular to the fact the taxpayer runs two breeding operations on his various properties. One of them has been operating since 1989. The other is a stud established on one of the properties within the last five years. The ruling notes the fact of the two operations but treats them as if they were part of the one business activity.
The new evidence was also directed to two issues which may arise if the discretion to waive the rule in s 35-10(2) is to be applied. The first issue arises under s 35-55(1)(a) which permits the Commissioner to waive the usual rule if he decides it would be unreasonable to apply it because:
…the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; …
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.
The taxpayer in this case wants to introduce evidence about the drought conditions in the south-east Queensland region in recent years, and their impact on his primary production business. None of this evidence is really new, he says: the Commissioner is generally aware of the drought conditions and he was provided with information about those matters in the course of the rulings process. The Commissioner also referred to that evidence and declined to exercise the discretion under s 35-55(1)(a) in the course of his reasons accompanying the ruling: exhibit one at p 84-85. That discussion in the reasons is surprising because – as the Commissioner points out now – the question posed in the ruling does not address s 35-55(1)(a). I note the drought and its impact do not feature extensively in the description of the scheme: exhibit one at p 75-79. Indeed, it is not apparent on the face of the description of the scheme that there is any real basis for the exercise of a discretion having regard to s 35-55(1)(a). Dr Schulte says admitting the additional evidence now would effectively redefine the scheme as it is identified in the ruling. The Commissioner says that is impermissible.
I agree with the Commissioner on this point. The impact of the drought was raised but barely addressed in the description of the scheme. Arguments made under s 35-55(1)(a) were considered as an afterthought in the reasons for the decision accompanying the ruling. If the discretion is to be considered in the ruling, it should be addressed directly and refer back to a clear factual basis in the description of the scheme.
The taxpayer also wants to introduce evidence that might shed light on the issue arising under s 35-55(1)(c). That provision permits the Commissioner to waive the usual rule in s 35-10(1) if he is satisfied it would be unreasonable to apply the 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)).
Note: Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.
There was some discussion in the respondent’s statement of facts, issues and contentions and the taxpayer’s written submissions about whether the taxpayer’s additional evidence would shed light on the nature of the business. The Commissioner, who started from the proposition that the taxpayer conducted a breeding business (albeit from two locations), suggested the additional evidence could tell me nothing about the nature of the business. But it was suggested the evidence might tell me something about the nature of the taxpayer – specifically, that he was an extraordinarily patient man who persisted in running a loss-making business long after it made any economic sense to do so. But the Commissioner says that sort of evidence was inadmissible, for the reasons discussed in Commissioner of Taxation v Eskandari (2004) 134 FCR 569 at [32] per Stone J; see also Applicant 1761 (Supra) at [17]-[19] per Logan J, Deputy President McPherson and Senior Member McCabe.
The taxpayer says his additional evidence is also directed to the second limb of s 35-55(1)(c). He argued the evidence provided objective support from independent sources verifying the operation will produce assessable income within a time frame that is reasonable in the industry. The Commissioner has given this argument short shrift in his statement of facts, issues and contentions, and in the reasons for decision accompanying the notice of private ruling. He says the taxpayer’s business has been losing money for over 23 years and there is nothing in the nature of the business that could suggest that was a reasonable time frame for achieving viability. While the Commissioner referred in the ruling to the evidence of a local expert who spoke of a “lead time” of about eight years for a commercial stud operation like the one commenced by the taxpayer within the last five years, the Commissioner was not persuaded by the expert evidence given the taxpayer’s primary production operations first began in 1989.
ONE BUSINESS ACTIVITY OR TWO?
At the heart of this dispute lies a difference in view as to whether there is a single business activity – a cattle breeding operation commenced in 1989 that is conducted from a number of different properties owned by the taxpayer, and which includes a newer stud – or two separate business activities (the cattle breeding operation established in 1989 and a separate stud established within the last five years) that together comprise the taxpayer’s primary production business. The distinction is important because the rule in s 35-10(2) “applies for an income year to each business activity you carried on in that year”: s 35-10(1). The Commissioner acknowledges the importance of the issues in his statement of facts, issues and contentions where he says (at [75]):
The question whether there is one business activity or two will affect the way the discretion is exercised and the facts taken into account in each case.
The Commissioner assumes there is a single business activity. His reasoning is explained in the statement of facts, issues and contentions. At [76], he quotes at length from Taxation Ruling 2001/14, which discusses the meaning of the expression “business activity”.
That view of the matter informs the Commissioner’s attitude towards the additional evidence tendered by the taxpayer. To the Commissioner, the evidence is not just inadmissible because it would (he says) redefine the scheme which he has described as a single business activity. It is also unhelpful because (at least in relation to the criteria in s 35-55(1)(c)) it sheds little light on the nature of the business activity or the likelihood that it will become viable any time soon.
The taxpayer is confident a case can be made out in relation to the stud if it is considered in isolation from the rest of the business. He has evidence that studs typically become profitable after about eight years, and the stud has not yet been going that long. To that end, some of the evidence tendered at the hearing – including the oral evidence of the taxpayer himself – is directed to the issue of whether there are two business activities or only one. There is also an argument that the Commissioner’s view there are two business activities instead of one is not an essential part of the factual matrix in the description. It may be that it is a legal conclusion drawn from stated facts, rather than a fact in and of itself.
The expression business activity is not defined in the ITAA 1997 (although business is defined very broadly). The Commissioner referred me to the discussion of the expression in Taxation Ruling 2001/14. The ruling says (at [38]):
…while a *business may be subdivided into a number of different *business activities this cannot be carried out to the point where the composite term in Division 35, ‘*business activity’ is deprived of practical meaning. An activity that forms part of a taxpayer’s overall *business will not be a separate ‘*business activity’ for the purposes of Division 35 unless it is capable of standing alone as an autonomous commercial undertaking of some sort…
I note the taxation ruling goes on (at [41]) to point out it is a question of fact and overall impression as to whether the activities in question are sufficiently distinct and discreet as to warrant being considered as separate business activities. I agree. I also note the ruling says (at [42]) it is important:
The separate business activities were each capable in their own right of producing assessable income and having attributed to them amounts that would otherwise be deductible.
The ruling also points out (at [49]) the taxpayer has the option of treating separate business activities that are nonetheless similar in kind as if they were part of the one activity: s 35-10(3). A taxpayer might want to do that when the overall business is profitable. The taxpayer in this case does not have that problem. He wants separate consideration of what he claims are separate business activities. Is he right?
In order to decide the question, I must compare the relevant characteristics of each operation. The starting point of the comparison must be the description of the scheme in the ruling. The Commissioner points out the scheme discloses:
·the taxpayer is essentially breeding cattle, albeit using conventional methods in respect of the larger commercial herd which is being bred for meat sales and artificial insemination in the stud which is producing cattle for stud purposes;
·the stud operation is located on one of his properties which has been equipped with special facilities but the properties are otherwise similar;
·cattle being produced in the stud are being used to enhance the commercial herd; and
·there has been no separation of accounts for the commercial herd and the stud animals, and both aspects of the operation are being carried on under the taxpayer’s own name.
In those circumstances, the Commissioner says it is appropriate to treat the two parts of the business as the one business activity. I see the Commissioner’s point: it is unclear from the description of the scheme whether the two aspects of the operation are “discrete in the manner they are conducted”: see Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1988) 20 FCR 288 at 304, referred to in the Commissioner’s statement of facts, issues and contentions at [79]. But even if I have regard to the additional material tendered by the taxpayer – most obviously his statement and his oral evidence – I am not persuaded a different view is appropriate. In any event, I would be reluctant to introduce the additional evidence on this issue because it would change the factual scenario. While I acknowledge one characterises the taxpayer’s operations as a business activity or business activities having regard to the law, the conclusion is still a question of fact (or at least a mixed question of law and fact) which forms part of the description. Fresh evidence directed to this question will inevitably work a material change to the factual scenario in the ruling. That is impermissible.
CONCLUSION
It is inappropriate to admit the additional evidence to the extent it addresses the question of whether there are two business activities or only one, for reasons I have explained. It is also inappropriate to admit the additional evidence insofar as it addresses the issue under s 35-55(1)(a) because the description in the ruling does not really provide a factual basis for the exercise of the discretion, and adding facts to the description would work a material change. I reach that view even though the Commissioner ventured into this territory in his reasons accompanying the ruling.
It is also inappropriate to consider the additional evidence directed to the issue arising under s 35-55(1)(c). That evidence is unhelpful in circumstances where the ruling proceeds on the assumption there is only one business activity that was first established 23 years ago and which has not yet become commercially viable. The additional evidence would in any event inevitably work a material change to the facts, and that is not acceptable.
In the absence of additional evidence, I am not persuaded the Commissioner’s ruling is wrong. The ruling makes sense on its face given the statement of facts to which it applies. If the statement of facts were different, a different conclusion may be appropriate – but that is not a question for me on this occasion.
The objection decision under review must therefore be affirmed.
I certify that the preceding 32 (thirty -two) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe. ..............................[Sgd].......................................
Associate
Dated 21 September 2012
Date of hearing 14 May 2012 Counsel for the Applicant Mr F.L Harrison QC Solicitors for the Applicant Macgillivrays Solicitors Counsel for the Respondent Dr R Schulte Solicitors for the Respondent Legal Services, Australian Taxation Office
3
0