Bentivoglio v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2013/2825)
Judgment date: 2 September 2014
Date published: 26 November 2014

Summary of decision:
Outlines the ATO's response to this case where the Tribunal considered an appeal in respect of a private ruling where the Commissioner ruled that he would not exercise his discretion that the non-commercial loss provisions in the Income Tax Assessment Act 1997 (ITAA 1997) did not apply to the taxpayer.

Overview of facts:
The taxpayer is a medical practitioner who, for the past 15 years, also carried on an olive growing and olive oil production business in Rylstone, near Mudgee. | In each of the income years from 2010 to 2014, the taxpayer incurred tax losses from his olive production business. | The taxpayer applied to the Commissioner for a private ruling on whether the Commissioner would exercise his discretion for relief from the application of the non-commercial loss provisions such that he could deduct the losses from his olive production business from his other income in the relevant income years. | The taxpayer argued that the discretion should be exercised because special circumstances existed which affected his olive production business in the relevant income years. The special circumstances were said to be the extraordinary challenges facing the olive industry, the infestation of the olive trees by the olive lace bug, the prolonged drought and dry conditions, the loss and damage of many trees from bushfire, the extraordinary hot weather event experienced in November 2009, spot fires from lightning strikes in February 2007 and November 2009 and the resulting smoke, and a hailstorm in January 2011. | In addition, the taxpayer's wife, who was an important figure in the running of the business, was diagnosed with a serious medical condition in late 2009 and spent time recovering in the subsequent years to 2013. | Issues decided by the AAT | The key issue for the Tribunal was whether, by reference to the scheme as identified by the Commissioner in the private ruling, the discretion in section 35-55 of the ITAA 1997 should be exercised in the taxpayer's favour. | In order for the exercise of the discretion, the Deputy President was required to be satisfied that the business activity, being the olive production business, would have passed one of the tests in the non-commercial rules had it not been for the special circumstances. | In his consideration of whether to exercise the discretion, the Deputy President concluded that the failure to show that a tax profit would have been generated in the absence of the special circumstances is not a necessary disqualifier to the exercise of the discretion in section 35-55 of the ITAA 1997, but it is nevertheless a relevant consideration. In reaching this conclusion, the Deputy President expressly disagreed with the Senior Member in Re Heaney and Commissioner of Taxation (2013) 138 ALD 144; [2013] AATA 331 who concluded that it was a necessary prerequisite for the exercise of the discretion that a tax profit would have been generated in the absence of the special circumstances. | The Deputy President considered the taxpayer's personal circumstances, and found that the pest infestation, the drought and adverse weather events (fires, hail, hot weather), and the illness of the taxpayer's wife were all circumstances that affected the profitability of the taxpayer's olive-growing business. | However, the Deputy President concluded that the economic challenges facing the olive industry were not special circumstances, as they are not unusual, uncommon or out of the ordinary, and did not affect the business activity but merely the profitability of the olives. | Having regard to the impact of the special circumstances on the taxpayer's business activity in the relevant years, and to the financial outcomes that could have been expected had those special circumstances not occurred, the Deputy President was satisfied that the discretion in section 35-55 of the ITAA 1997 should be exercised in each of the income years except the 2014 year.

Issues decided:
The key issue for the Tribunal was whether, by reference to the scheme as identified by the Commissioner in the private ruling, the discretion in section 35-55 of the ITAA 1997 should be exercised in the taxpayer's favour. In order for the exercise of the discretion, the Deputy President was required to be satisfied that the business activity, being the olive production business, would have passed one of the tests in the non-commercial rules had it not been for the special circumstances. In his consideration of whether to exercise the discretion, the Deputy President concluded that the failure to show that a tax profit would have been generated in the absence of the special circumstances is not a necessary disqualifier to the exercise of the discretion in section 35-55 of the ITAA 1997, but it is nevertheless a relevant consideration. In reaching this conclusion, the Deputy President expressly disagreed with the Senior Member in Re Heaney and Commissioner of Taxation (2013) 138 ALD 144; [2013] AATA 331 who concluded that it was a necessary prerequisite for the exercise of the discretion that a tax profit would have been generated in the absence of the special circumstances. The Deputy President considered the taxpayer's personal circumstances, and found that the pest infestation, the drought and adverse weather events (fires, hail, hot weather), and the illness of the taxpayer's wife were all circumstances that affected the profitability of the taxpayer's olive-growing business. However, the Deputy President concluded that the economic challenges facing the olive industry were not special circumstances, as they are not unusual, uncommon or out of the ordinary, and did not affect the business activity but merely the profitability of the olives. Having regard to the impact of the special circumstances on the taxpayer's business activity in the relevant years, and to the financial outcomes that could have been expected had those special circumstances not occurred, the Deputy President was satisfied that the discretion in section 35-55 of the ITAA 1997 should be exercised in each of the income years except the 2014 year.

ATO view of decision:
The decision is one decided on its facts and does not have wider ramifications. | Although the Deputy President's view on how the discretion in section 35-55 of the ITAA 1997 is to be construed is not consistent with the Commissioner's view in paragraphs 13A and 41D of TR 2007/6, the paragraphs in the ruling are consistent with the decision in Heaney and Commissioner of Taxation [2013] AATA 331. The ATO does not intend to amend the ruling.

Administrative treatment:

Legislative references: Income Tax Assessment Act 1997 35-5(1) 35-10 35-55 Taxation Administration Act 1953 14ZZK(b)(ii) 359-5 359-20 359-60 Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 The Act
Case references: Commissioner of Taxation v McMahon [1997] FCA 1087 (1997) 79 FCR 127 (1997) 37 ATR 167 97 ATC 4968 Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508 (2010) 79 ATR 582 2010 ATC 20-183 Re Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Commissioner of Taxation [2013] AATA 99 Re Heaney and Commissioner of Taxation (2013) 138 ALD 144 [2013] AATA 331 2013 ATC 10-315 Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 84 ATR 1 2012 ATC 20-361 [2012] HCA 55 Minister of Community Services and Health v Chee Keong Thoo [1998] FCA 54 Groth v Secretary, Department of Social Security [1995] FCA 1708 (1995) 40 ALD 541
Subject references: Income tax