Case: Commissioner of Taxation v Eskandari [2004] FCA 8 ; (2004) 134 FCR 569
Outcome: followed
In my opinion, the extrinsic materials do not indicate an intention to distinguish between those two expressions. They are discussed by Stone J in Commissioner of Taxation v Eskandari [2004] FCA 8 ; (2004) 134 FCR 569 ( Eskandari ) at [14]-[17]. I respectfully adopt her Honour's observations. I shall not repeat them in these reasons. The relevant legislative intention which appears to have underpinned Div 35 was to distinguish between "activities which are essentially private or lifestyle choices" and those which involve "genuine business activities" (see para 228 of "Review of Business Taxation a Tax System Redesigned", 1999). I also note, by way of illustration, that para 1.10 of the Explanatory Memorandum to the New Business Tax System (Integrity Measures) Bill 2000 (Cth) by which Div 35 came to be in the ITAA 1997 says: Division 35 does not change the existing income tax concept of what constitutes the carrying on of a business. The Division will apply within that environment to those individuals able to claim business deductions under the existing law on the grounds that they are carrying on a business and meet all existing tests of deductibility. 30 Paragraph 1.15, when comparing the key features of the proposed law and the current law, says that the change is to provide that the excess of deductions over assessable income from a business may be claimed against other income only if one of the tests is satisfied or the Commissioner exercises a discretion to permit it. 35 Eskandari is the only decision concerning Div 35 of Pt 2 - 5 of Ch 2 of the ITAA 1997 to which my attention was drawn. The taxpayer sought to set-off against his normal salary the losses incurred in his unrelated business activity as a registered migration agent. It was common ground that, unless he could bring himself within the exception to the application of s 35 - 10 provided by s 35 - 55 (1)(b)(i), s 35 - 10 would prevent him from setting off those losses. Section 35 - 55 (1)(b)(i) permitted the Commissioner to decide that the rule in s 35 - 10 does not apply to a business activity for a year or years of income if satisfied that it would be unreasonable to apply it because the business activity, in respect of the relevant income years, "because of its nature" would not satisfy one of the other tests imposed. Hence, the relevant issue was a narrow one: could s 35 - 55 (1)(b)(i) apply because of the nature of the business, namely that it was in its start-up phase and the anticipated revenue stream would not come about for some two years or more. The taxpayer claimed that his new business had that nature because he charged only a modest initial fee, and then incurred significant expense, and would only receive the substantial part of his fee when the visa application was granted, possibly some years later. Stone J decided that the term "because of its nature" referred to an inherent feature of the taxpayer's business activity in common with business activities of that type. Unless the "lead time" before a substantial success fee became payable was a common or inherent feature of migration agent businesses, rather than a consequence of how the taxpayer chose to charge, the exception in s 35 - 55 (1)(b)(i) could not apply and the Commissioner would not have a discretion to exercise. 36 Counsel for Mr Watson, at the other end of the spectrum of submissions, contended that there should be symmetry between the concepts of "taxable income" and "allowable deductions", in particular those deductions falling within the second limb of the income nexus test specified in s 8 - 1 (1)(b) of the ITAA 1997. If the premiums paid on the PIP policy were accepted as deductions by the Commissioner (as they apparently were), on the basis that they were necessarily incurred in carrying on the financial planning business, then payments made under the PIP policy should also be regarded as income received in carrying on the business.