Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779 (3 November 2011)

Last Updated: 4 November 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 779

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2011/1761

TAXATION APPEALS DIVISION		)
	Re		APPLICANT 1761 OF 2011

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

The Honourable Justice Logan RFD, Presidential Member The Honourable Dr B H McPherson CBE, Deputy President Senior Member Bernard J McCabe

Date 3 November 2011

Place Brisbane

Decision

The decision under review is affirmed.

..............................................
Presidential Member

CATCHWORDS

TAXATION – objection to private ruling – business deductions – applicant’s entitlement to deduct business losses from other assessable income – cattle rearing business – whether applicant’s business had not made more assessable income than deductions “because of its nature” – applicant’s business losses the result of personal managerial choices – objection decision affirmed

TAXATION – business deductions – when does a “commercially viable period” for a particular business activity commence –note to section refers to a lead time between commencing an activity and producing assessable income – commercially viable period assessed from the commencement of business

Income Tax Assessment Act 1997 (Cth)

New Business Tax System (Integrity Measures) Act 2000 (Cth)

Taxation Administration Act 1953 (Cth)

Commissioner of Taxation v Eskandari [2004] FCA 8; (2004) 134 FCR 569 followed

Commissioner of Taxation v McMahon [1997] FCA 1087; (1997) 79 FCR 127 considered

Re Peerless Marine Pty Ltd and Federal Commissioner of Taxation [2006] AATA 765; (2006) 63 ATR 1303 cited

Thomas v Federal Commissioner of Taxation (1972) 46 ALJR 397 cited

Re Kennedy and Federal Commissioner of Taxation [2005] AATA 329; (2005) 59 ATR 1030; 2005 ATC 2098 considered

REASONS FOR DECISION

3 November 2011

The Honourable Justice Logan RFD, Presidential Member The Honourable Dr B H McPherson CBE, Deputy President Senior Member Bernard J McCabe

1. The Applicant has sought the review by the Tribunal of an objection decision in respect of an application which he made for a private ruling.^[1] He is a senior member of a learned profession. He actively practises that profession. Ever since May 1988 he has also been engaged in the rearing of beef cattle for sale for beef production.
2. In November 2010 the Applicant made an application in the approved form under Division 359 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) for a private ruling. The approved form describes such an application as one for a private ruling “on the Commissioner’s discretion for non-commercial business losses”. The application related to the 2010 to 2015 income years. The Commissioner treated the application as requiring him to answer this question:

“Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (Cth) to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2009-10- to 2014-15 years of income?”

The answer given by the Commissioner to this question and the resultant ruling were succinct. He answered the question, “No”.

3. The Applicant objected against this private ruling. On 3 May 2011 the Commissioner disallowed that objection. The Applicant has sought the review by the Tribunal of that objection decision.
4. It is desirable first to draw attention to the nature of the review jurisdiction which the Applicant has invoked. That subject was addressed by the Full Court of the Federal Court in Commissioner of Taxation v McMahon [1997] FCA 1087; (1997) 79 FCR 127 (McMahon’s Case). Though that case arose under the original private ruling regime found in the then Part IVAA of the TAA, whereas the present arises under the private ruling regime now found in Division 359 in Schedule 1 to the TAA, the observations made in the Full Court in McMahon’s Case remain pertinent.
5. In McMahon’s Case Lockhart J observed (79 FCR at 133) that the subject matter of the review before the Tribunal is the arrangement identified by the Commissioner. To like effect are the separate observations of Beaumont J (79 FCR at 141) and of Emmett J (79 FCR at 150) that the Tribunal cannot “redefine the arrangement”. Under the present private ruling regime the term “scheme” is used, rather than, as in the former Part IVAA, “arrangement” but that is a distinction without a difference. If, as here, the objection decision is to confirm the ruling initially given, the subject matter of the review is the scheme as identified by the Commissioner in that ruling as confirmed. Were the Commissioner, by his objection decision, to have altered the initial ruling, the subject matter of any subsequent review of that objection decision would have been the scheme as identified by the Commissioner in that altered ruling.
6. Given its jurisdictional importance, it is necessary to set out in full the “scheme” as identified by the Commissioner in his private ruling:

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. ...

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

the application for private ruling dated 11 November 2010,

a letter from the applicant’s accountant dated 11 November 2010,

non-commercial losses evidentiary checklist,

Income tax return information from the Australian Taxation Office computer system,

actual and projected profit and loss statements 2000 to 2009,

Seer report financial projections 2011 to 2016,

Australian Bureau of Agricultural and Resource Economics and Sciences financial performance report 2007-08 to 2009-10.

Since commencing the business of cattle grazing in 1988 with the purchase approximately 566 hectares, you have purchased additional land when available.

You now own and operate beef cattle breeding and fattening business comprised of approximately 1200 head of cattle run on three separate properties with a total area of approximately 2,000 hectares.

These properties are:

Property name: Ardverikie: location 65 kilometres south west of Newtonmore

Total area: 1, 189 hectares (59% of total land holding)

Date purchased: 1998

Property name: Glasgow: location Clyde Valley

Total area: 763 hectares (38% of total land holding)

Date purchased: 1998

Property name: Gigha Island: location 45 kilometres north east of Kintyre

Total area: 60 hectares (3% of total land holding)

Date purchased: 2008

You have incurred substantial debt to complete those purchases leading to higher, sustained interest costs. The additional land must be developed, this includes fencing, construction of yards extensive clearing of regrowth and pasture development. You adopted a breeding up program to maintain and improve the quality of the breeding herd, resulting in depressed profitability with the retention of all females to enlarge the breeding herd.

The drought which consumed much of the last decade affected your business in a number of ways;

Carving and branding rates were significantly depressed, and progressively worsened as the drought persisted, to the point where the decision was taken to substantially reduce the breeding herd on the Moogerah property and to focus that activity on the Cardross property.

Insufficient numbers of replacement heifers meant that older, less productive cows were retained and because all heifers were put into the breeding herd regardless of their standard, the quality of the breeding herd progressively deteriorated. That is now being addressed.

Steers which were turned off as weaners showed the effects of drought in their condition and were generally of poorer quality. They were sold into a market which was limited by the drought conditions, leading to depressed prices.

Expenses increased with additional purchases of fodder and grains.

The three members of the full time workforce at that time could not be effectively deployed in advancing the development of the business because they were required to attend to drought-related tasks such as additional feeding of cattle, more frequent movements of cattle from paddock to paddock to make sure of the available feed, pumping limited ground water for stock use and inspection of dams for bogged cattle.

Your current level of interest charges, while above average, reflects recent purchases requiring borrowing which have not yet been paid down.

This table shows the income, expense and loss as recorded in your income tax returns since the 1999-00 income year.

Year	Income	Expenses	Loss	Profit
1999-00	$71,500	$706,680	$643,451
2000-01	$136,944	$661,921	$536,705
2001-02	$322,246	$722,931	$451,245
2002-03	$127,892	$670,469	$576,071
2003-04	$135,457	$784,349	$688,716
2004-05	$141,080	$822,949	$703,169
2006-07	$164,411	$967,128	$811,097
2007-08	$201,208	$1,105,356	$904,804
2008-09	$156,417	$972,538	$811,951

Seer Profit and Loss projections

Year	Income	Expenses	Loss	Profit
2009-10	$45,834	$558,231	$512,397
2010-11	$264,768	$523,391	$258,623
2011-12	$312,368	$485,003	$172,635
2012-13	$414,508	$453,146	$38,638
2013-14	$390,888	$441,753	$50,865
2014-15	$434,880	$452,084	$17,204
2015-16	$429,408	$394,084		$35,324

You have invested in new infrastructure and machinery to boost productivity.

You have sought to expand your business in order to achieve economies of scale to assist in offsetting the declining terms of trade of the beef industry. Such expansion efforts have impeded the business from returning book profits, primarily due to the need to retain large numbers of female progeny in order to continually expand the herd, thereby making them unavailable for sale. Furthermore, in recent years a long and protracted period of severe drought conditions has resulted in a reduction in cattle growth and pregnancy rates as well an increase in costs due to the need for additional feed supplements. As a result the productivity and efficiency of the business has been impacted, further compromising financial performance.

The strategic focus of the business is now consolidating the Gigha Island purchase, preaching an additional area of land adjoining Glasgow, and resuming the improvement of the herd following the cessation of drought conditions.

The business currently joins approximately 550 female cattle annually with progeny regularly classified in accordance with the Santa Gertrudis Breeders Association classification system. The herd is run as a sell replacing breeding herd whereby some female progeny are annually selected and retained to replace those older females which have been culled for age or infertility. This process along with the regular introduction of new genetics through bull purchases, secures the continued genetic improvement of the herd. The surplus females and male progeny are grown and finished on a grassed basis, with the aid of protein supplementation and fodder crops when the appropriate opportunity arises.

The marketing of sale cattle is undertaken with the assistance of a local stock agent. Local saleyards as well a direct to meatworks consignments for suitable cattle are the usual marketing methods adopted.

Labour is provided by you and your three sons, one full time employee and contractors as required.

The independent evidence you provided in the Seer Report, expresses the belief that the commercially viable period for the beef cattle industry, is three to six years (page three Seer report). The Seer report predicts your business will attain a tax profit in six years commencing from the 2010-11 year of income.

Your income of non-commercial loss purposes in the income year before you lodged your application for a private ruling was greater than $250,000.

7. The Commissioner found that this “scheme” commenced on 1 July 1988.
8. Our task, sitting in place of the Commissioner on review, is to consider afresh the question as to whether, having regard to this scheme, the discretion conferred by s 35-55(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) should be exercised in favour of the Applicant? A favourable exercise of that discretion excludes the application of a rule found in s 35-10(2). The effect of that rule is to prevent an individual’s loss from what Parliament has termed “non-commercial business activities” being offset against other assessable income of that individual in the year in which the loss is incurred. Instead, the individual’s ability to deduct the loss is deferred.
9. The answer to the question posed depends on what is the true construction of s 35-55(1)(c), in particular of the criteria which, materially, it specifies as conditions precedent to the exercise of that discretion and whether, as so construed, those criteria are present in the facts which the Commissioner identified in the ruling as constituting the scheme.
10. Section s 35-55 forms part of Division 35 of the ITAA 1997. In its original form, that division was inserted into the ITAA 1997 by the New Business Tax System (Integrity Measures) Act 2000 (Cth). It should be observed at once that neither then nor now is Division 35 in any way concerned with an individual’s integrity. Rather, according to a value judgement reflected in the terms specified in that division, Division 35 contains measures thought necessary by Parliament to maintain fiscal integrity in relation to income tax. Those measures are truly sui generis.
11. The provisions within Division 35 material to the disposition of this application for review should now be set out.

35-5 Object

(1) The object of this Division is to improve the integrity of the taxation system by:

(a) preventing losses from non-commercial activities that are *carried on as *businesses by individuals (alone or in partnership) being offset against other assessable income; and

(b) preventing pre-business capital expenditure and post-business capital expenditure by individuals (alone or in partnership) in relation to non-commercial activities being deductible under section 40-880 (business related costs);

unless certain exceptions apply.

(2) This Division is not intended to apply to activities that do not constitute *carrying on a *business, (for example, the receipt of income from passive investments).

3510 Deferral of deductions from noncommercial business activities

(1) The rule in subsection (2) applies for an income year to each *business activity you carried on in that year if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), unless:

(a) you satisfy subsection (2E) for that year, and one of the tests set out in any of the following provisions is satisfied for the business activity for that year:

(i) section 35-30 (assessable income test);

(ii) section 35-35 (profits test);

(iii) section 35-40 (real property test);

(iv) section 35-45 (other assets test); or

(b) the Commissioner has exercised the discretion set out in section 3555 for the business activity for that year; or

(c) the exception in subsection (4) applies for that year.

Note: This section covers individuals carrying on a business activity as partners, but not individuals merely in receipt of income jointly. Compare the definition of partnership in subsection 9951(1).

Rules

(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.

Note 1: There are modifications of this rule if you have exempt income (see section 3515) or you become bankrupt (see section 3520).

Note 2: This rule does not apply if your excess is solely due to deductions under Division 41 (see section 3510 of the Income Tax (Transitional Provisions) Act 1997).

Example: Jennifer has a salaried job, and she also carries on a business activity consisting of selling lingerie.

Jennifer starts that activity on 1 July 2002, and for the 200203 income year, the activity produces assessable income of $8,000 and deductions of $10,000. The activity does not pass any of the tests and the discretion is not exercised so the $2,000 excess is carried over to the next income year in which the activity is carried on.

For the 200304 income year, the activity produces assessable income of $9,000 and deductions of $10,000 (excluding the $2,000 excess from 200203). Again, no tests passed and no exercise of discretion.

$3,000 is carried over to the next income year (comprising the $1,000 excess for the current year, plus the previous year’s $2,000 excess) when the activity is carried on.

(2A) You cannot deduct an amount under section 40-880 (business related costs) for expenditure in relation to a *business activity you used to *carry on if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership) unless:

(a) you satisfied subsection (2E), and one of the tests set out in any of the following provisions was satisfied for the business activity:

(i) section 35-30 (assessable income test);

(ii) section 35-35 (profits test);

(iii) section 35-40 (real property test);

(iv) section 35-45 (other assets test); or

(b) the Commissioner has exercised the discretion set out in section 35-55 for the business activity; or

(c) the exception in subsection (4) applied;

for the income year in which the business activity ceased to be carried on or an earlier income year.

(2B) If you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), you cannot deduct an amount under section 40-880 (business related costs) for expenditure in relation to a *business activity:

(a) you propose to *carry on; or

(b) another entity proposes to carry on if the other entity is not an individual, either alone or in partnership;

for an income year before the one in which the business activity starts to be carried on.

(2C) This section applies to an amount that you could have deducted, apart from paragraph (2B)(a), as if it were an amount attributable to the *business activity that you can deduct from assessable income from the activity for the income year in which the business activity starts to be *carried on.

(2D) You can deduct expenditure covered by paragraph (2B)(b) for the income year in which the *business activity starts to be *carried on.

Income Requirement

(2E) You satisfy this subsection for an income year if the sum of the following is less than $250,000:

(a) your taxable income for the year;

(b) your *reportable fringe benefits total for that year;

(c) your *reportable superannuation contributions for that year;

(d) your *total net investment losses for that year

For the purposes of paragraph (a), when working out your taxable income, disregard any excess mentioned in subsection (2) for any *business activity for that year that you could otherwise deduct under this Act for that year.

Grouping business activities

(3) In applying this Division, you may group together *business activities of a similar kind.

Exceptions

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

(a) the activity is a *primary production business, or a *professional arts business; and

(b) your assessable income for that year (except any *net capital gain) from other sources that do not relate to that activity is less than $40,000.

(5) A professional arts business is a *business you carry on as:

(a) the author of a literary, dramatic, musical or artistic work; or

Note: The expression “author” is a technical term from copyright law. In general, the “author” of a musical work is its composer and the “author” of an artistic work is the artist, sculptor or photographer who created it.

(b) a *performing artist; or

(c) a *production associate.

3555 Commissioner’s discretion

(1) The Commissioner may, on application, decide that the rule in subsection 3510(2) does not apply to a *business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in 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; or

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

(b) for an applicant who carries on the business activity who satisfies 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 yet satisfied one of the tests set out in section 3530, 3535, 3540 or 3545; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 3510(2) and (2C)); or

(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.

(2) The Commissioner may, on application, decide that the rule in subsection 35-10(2B) does not apply to a *business activity for an income year if the Commissioner is satisfied that it would be unreasonable to apply that rule because special circumstances of the kind referred to in paragraph (1)(a) of this section prevented the activity from starting.

Note: This subsection is intended to provide for a case where a business activity would have begun to be carried on and satisfied one of the tests if it were not for the special circumstances.

(3) An application for a decision by the Commissioner under this section must be made in the *approved form.

12. The rule in s 35-10(2) of the ITAA 1997 only applies where an individual is undertaking a business activity.
13. It was common ground before us that the applicant was carrying on a business activity. As the asterisk before it where it appears in the ITAA 1997 indicates, “business” is a term defined in the “dictionary” found in s 995-1 of that Act. It is there defined in an inclusive way so as to include any profession, trade, employment, vocation or calling, but so as to exclude any occupation as an employee. In effect, the definition does nothing more than confirm what would be apparent from the ordinary meaning of the word “business” in any event which is that it excludes activity as an employee. The body of authority which has accrued over the years in relation to what does or does not constitute the carrying on of a business remains pertinent. In this Tribunal, in Re Peerless Marine Pty Ltd and Federal Commissioner of Taxation [2006] AATA 765; (2006) 63 ATR 1303 at [70] to [71], Deputy President Hack S.C. offered a helpful summary of principles to be derived from that body of authority. As both that case and Thomas v Federal Commissioner of Taxation (1972) 46 ALJR 397 exemplify, whether an activity which has consistently proved unsuccessful can amount to the carrying on of a business can be controversial but that fact alone is not fatal to a conclusion that a business is being and has been carried on. Even allowing for this, whether, by the 2009 income year, after more than two decades of sustained and spectacular losses, it could be concluded that the Applicant was carrying on a business activity at all is perhaps moot. It is not necessary further to explore this point. In the absence of controversy concerning it we proceed on the basis that the Applicant is to be regarded as carrying on a rural business activity both in the 2009 income year (the year preceding the first year in respect of which a private ruling was sought) and in each of the income years in respect of which he has sought a private ruling.
14. We begin our consideration of the meaning of s 35-55(1)(c) with a consideration of the text of that subsection. Within that subsection, a preamble precedes the specification, in sub-paragraphs (i) and (ii), of the criteria the cumulative satisfaction of which is necessary for a favourable exercise of the discretion to exclude the rule from application. Materially, that preamble provides, “the business activity has started to be carried on and, for the excluded years:” The drafting of the preamble is such that the reference in the excerpt just quoted to “started” cannot mean that the “start” of the business activity must have occurred in the very year preceding “the most recent income year ending before the application is made”. The latter occurs earlier in the preamble and does not govern when the “start” must have occurred. Thus, an application for an exercise of the discretion is not only able to be made in the year after the business activity has started. That the Applicant’s business activity commenced as far back as 1988 is not an automatic bar to the making of a ruling in his favour. It is enough that the application is made at a time after the business has started.
15. Within the phrase, “for the excluded years”, the word, “for”, which can carry a wide variety of meanings depending on the context in which it is used, is used in the sense of “as regards, with regard or respect to, concerning” (Oxford English Dictionary, Online Edition, meaning 26). The “excluded years” are the years in respect of which application for exclusion from the application of the rule is sought.
16. There was considerable debate before us as to whether the phrase, “for the excluded years” in the preamble meant that regard to the past was not relevant to deciding whether the criteria in sub-paragraphs (i) and (ii) were met. The Applicant submitted that it did have this effect, the Commissioner to the contrary. We do not accept this submission of the Applicant. While the preposition “for” directs attention to a particular “excluded year” (or, as here, years), that does not render the events of the past irrelevant either to an assessment of whether the position in that year is because of the nature of the business activity, as sub-paragraph (i) requires or whether there is an objective expectation of the kind specified in (ii). Events of the past may provide a touchstone for whether one or the other of the criteria in s 35-55(1)(c) are met. This is not, contrary to another submission made on behalf of the Applicant, to give any retrospective operation to the amendments which put s 35-55(1)(c) in its present form, only to assess for a given excluded year on and from the operation of the amendments whether a present particular state of affairs of the business activity for that year is because of the nature of that activity and whether, as a matter of objective expectation that particular state of affairs will change within the limits of a specified period.
17. Of the criteria specified in s 35-55(1)(c), the meaning of a materially indistinguishable predecessor of the present sub-paragraph (i) was considered by Stone J in Federal Commissioner of Taxation v Eskandari [2004] FCA 8; (2004) 134 FCR 569 (Eskandari). Her Honour remarked [2004] FCA 8; (134 FCR 569 at [32]) of the phrase, “because of its nature” that it concerned a failure to produce assessable income greater than the deductions attributable to it as a “result of some inherent feature that the taxpayer’s business activity has in common with the business activities of that type”. By the use of the third person possessive (“its nature” – emphasis added), Parliament has, a matter of ordinary language, directed attention to a feature of the business rather than of the individual who for the time being is conducting that business.
18. That is not to say that a failure of a business activity to produce assessable income greater than deductions attributable to that business because of an inherent feature of that particular business and a failure which has occurred because of managerial decision-making must always, necessarily, be mutually exclusive. The Applicant submitted that they were not necessarily mutually exclusive concepts and, in the course of oral submissions, the Commissioner came to concede this. The note to s 35-55(1)(b) and s 35-55(1)(c) speaks of a “lead time” for a business activity to produce assessable income. In the ITAA 1997, notes and examples within a section form part of the Act: s 2-45 (see also s 950-100 of the ITAA 1997). The example given is that of the planting of hardwood trees for harvest in respect of which it is stated that “many years would pass before the activity could reasonably be expected to produce income”. Superficially, even this example appears to exclude the managerial but it is not inconceivable that, in particular cases, evidence might emerge in the facts constituting a “scheme” for the purposes of a private ruling that there are a number of schools of thought as to forestry practices, each respectable and reasonably held in the timber industry, as to how efficiently to bring a plantation to the stage of suitability for commercial harvesting. These schools of thought might, conceivably, entail different “lead times” for commercially viable wood harvesting of timber. It would be “in the nature of” the business activity that this lead time was entailed but that lead time would, in turn, be influenced by a choice of forestry management usual and appropriate for and adapted to the nature of the business activity. In relation to beef production it is possible to imagine similar cases. Feed lot or open range grazing, might for example, have different “lead times” for fattening cattle for market.
19. Thus, when assessing whether the criterion in s 35-55(1)(c)(i) is satisfied, one may be examining something which, though it appears just to be “in the nature of” a particular business activity is, in truth and on closer analysis, the product of an interplay between a characteristic of the activity and the way the activity is conducted. Put another way, it may be “in the nature of” a particular business activity that it is ordinarily conducted in a particular way. An understanding of this may, in turn, highlight that the failure in an excluded year to produce a surplus of assessable income was referable to idiosyncratic business methods rather than those to be expected in any event from the very nature of the business activity concerned. Just this point was, in our opinion, made by Stone J in Eskandari [2004] FCA 8; (134 FCR 569 at [29]) in holding that the provision was not concerned with “features that are peculiar to the way in which the individual taxpayer runs his business”.
20. In assessing what is “in the nature of” a particular business activity, care might also be necessary to avoid extrapolations from generalisations or averages derived from a range of different circumstances. What is “in the nature” of a beef cattle business activity conducted on well watered, prime, grazing land might be quite different from that on marginal, dry, grazing land. An understanding derived only from data referable to the beef cattle industry as a whole might be misleading as to what is in the nature of an activity conducted on either the former or the latter type of land when considered separately.
21. Such considerations flow naturally from the text of the statute itself. There was a tendency in the course of the submissions for each of the parties not just to have regard to what was stated in an accompanying explanatory memorandum but even to debate what was meant by the language employed or examples given in that memorandum. Such debates are sterile and apt to distract from an obligation to give primacy to the language in fact adopted by Parliament in the statute. Especially that is so where, in an innovative departure from traditional parliamentary drafting, the relevant provision itself contains a note and example which are expressed to form part of the statute.
22. Even making due allowance for considerations which flow from the text of the statute, the facts which comprise the “scheme” for the purposes of the private ruling sought do not support a conclusion that it is in the nature of the activity of beef cattle production that it takes more than two decades or anything like that to produce assessable income greater than the deductions attributable to it. There is nothing in the Seer report which would support such a conclusion. Instead, what is revealed by the facts comprising the “scheme” is a series of idiosyncratic, managerial choices made by the Applicant as to how to go about the business activity. That he was able to continue the business activity for all of these years and to make these choices was not, on the evidence, because of the nature of that business activity at all but rather because of his ready access either to funding from his own other resources or from external financiers. These have enabled him to expand his property holdings, to improve his properties and progressively to acquire particular plant and equipment. The Applicant was and remains perfectly entitled to make such choices in conducting his business activity. However, not every managerial reaction to events encountered in the course of a business activity or measure designed to achieve economies of scale is to be regarded as having occurred because of the nature of that activity.
23. Our conclusion is that the criterion specified in s 35-55(1)(c)(i) is not satisfied in respect of any of the excluded years for the business activity conducted by the Applicant.
24. Because the criteria specified in s 35-55(1)(c) must each be satisfied, this conclusion means that it is not strictly necessary for us to consider whether the Applicant does meet the criterion specified in s s 35-55(1)(c)(ii) of the ITAA 1997. However, the meaning and application of that paragraph was fully argued. In deference to that argument and to meet the contingency that some error of law may attend our conclusion in relation to s 35-55(1)(c)(i) it is desirable that we consider also the position with respect to s 35-55(1)(c)(ii).
25. Read in isolation, the wording of this criterion presents the difficulty of not designating when the “period that is commercially viable” to which it refers commences. It is never permissible to approach the construction of a statutory provision in such a narrow fashion. The Applicant seized upon the phrase, “for the excluded years” in the preamble and the reference in sub-paragraph (ii) to “objective expectation” to ground a submission that the period commenced in the excluded year(s) in question. If so read and having regard to the opinion as to future profitability specified in the Seer report and set out in the facts quoted above, the Applicant would satisfy s 35-55(1)(c)(ii) in respect of this business activity.
26. The difficulty with this construction of the expression “period that is commercially viable” is that it pays insufficient attention to context. Here, context includes not only the earlier part of the preamble, “the business has started” but also the note to, materially, paragraph (c), which speaks of an intention “to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income”. The reference in the note to the production of “any assessable income” is not felicitous, as s 35-55(1)(c) refers not to just to the production of any assessable income from the business activity but rather such as will “exceed the deductions attributable to it”. Even so, the reference in the note to the parameters of the lead time is telling. It removes whatever doubt there otherwise may be as to when it is that the “commercially viable period” commences for the purpose of the expectation specified in s 35-55(1)(c)(ii) of the ITAA 1997. Though, as we have already opined, “the business has started” in the preamble does not mean that the “start” of the business activity must have occurred in the very year preceding “the most recent income year ending before the application is made”, reading the paragraph as a whole and in the context of the note does mean that this period runs from what the note terms the “commencement”. So construed, there could not in this case be any reasonable expectation that the Applicant’s business activity “will produce assessable income for an income year greater than the deductions attributable to it for that year” because, even for the first of the excluded years, that commercially viable period had long since expired, having regard to the opinion given in the Seer report.
27. This is not to deny that the words “objective expectation” lend a prospective quality to the factual assessment entailed in s 35-55(1)(c)(ii). As was the Commissioner before us, we are obliged to determine, for the years 2010 to 2015, whether, as a matter of objective expectation, the Applicant’s business activity will produce the excess of assessable income specified. In so doing, we must act on objective evidence where available. On that evidence, six years is a commercially viable period. But that period runs from when the business activity commences. Approaching the matter prospectively and as a matter of objective expectation this business will not produce the excess of assessable income within that period. As a matter of objective expectation, it will do so, in respect of the excluded years, well over two and approaching three decades after its commencement. That is, as we have stated, long after the expiry of a commercially viable period.
28. We should record that, though we have considered the submissions made by the parties as to the evolution of the language of Division 35 from its initial enactment to its present form, we do not consider that this offers any assistance in giving meaning to when the “commercially viable period” commences.
29. It follows that, having regard to the findings of fact in respect of the “scheme”, our conclusion is that the Applicant additionally cannot satisfy s 35-55(1)(c)(ii) of the ITAA 1997.
30. Reference was made in the course of the submissions both for the Applicant and for the Commissioner in relation to s 35-55(1)(c)(ii) to an earlier decision of the Tribunal, Re Kennedy and Commissioner of Taxation [2005] AATA 329; (2005) 59 ATR 1030; 2005 ATC 2098. The outcome of that case turned primarily on Deputy President Purvis’ conclusion that the applicant was not carrying on a business activity and, hence, that Division 35 was inapplicable. The learned Deputy President did also, at [35], briefly advert to why, alternatively, none of the bases for the exercise of the discretion conferred by s 35-55(1) could be established but not in a way which involved any detailed consideration of the meaning of the section as it then stood, including, in particular, the meaning of “commercially viable period”. Given the primary basis upon which that case turned, it was not necessary for the Deputy President to embark upon any such consideration. The case does, nevertheless, give further pause for thought about whether, if there has been a prolonged past period of sustained loss-making, further such loss-making in an excluded year should be regarded as resulting from the conduct of a business activity. It must surely become progressively more difficult as such loss making years accumulate to conclude that an activity is being conducted with a view to profit, as opposed to other purposes. As we have already observed though, it was common ground in the present case that the Applicant was to be regarded as carrying on a business activity in the excluded years.
31. The result is that the Commissioner’s objection decision must be confirmed.

I certify that the 31 preceding paragraphs are a true copy of the reasons for the decision herein of the Honourable Justice Logan RFD, Presidential Member; The Honourable Dr B H McPherson CBE, Deputy President and Senior Member Bernard J McCabe

Signed: .....................................................................................

Associate

Date/s of Hearing 10 October 2011

Date of Decision 3 November 2011

Counsel for the Applicant Mr P Dunning S.C.

Solicitor for the Applicant Taylor & Co

Counsel for the Respondent Mr R Schulte

Solicitor for the Respondent ATO Legal Services Branch

---

1. ^[1] The Applicant requested, pursuant to s 14ZZE of the Taxation Administration Act 1953 (Cth) (TAA), that the hearing of the review be held in private. The hearing was so conducted. That has the consequence that we are obliged to ensure, as far as practicable, that our reasons for decision are framed so as not to be likely to enable the identification of the applicant: s 14ZZJ of the TAA. Accordingly, we have amended the version of our reasons released for general publication so as to comply with this obligation. For convenience, we have prepared an additional version of the reasons where the amendments concerned are shown parenthetically in italics. The version of our reasons released to the parties employs the true names of persons and places.