EDITED VERSION OF NOTICE OF PRIVATE RULING
Authorisation Number: 34348
This Ruling is a 'Private Ruling' for the purposes of Part IVAA of the Taxation Administration Act 1953.
THIS RULING APPLIES TO:
Taxpayers in this Project who have entered into the arrangement on or before 30 June 2001 and have subscribed to more than one stapled interest. They are small business taxpayer for the 2000-01 income year and have elected to be in the STS for the 2001-02 and 2002-03 income years.
YEARS OF INCOME TO WHICH THIS RULING APPLIES:
Year ended 30 June 2001
Year ended 30 June 2002
Year ended 30 June 2003.
TAX LAWS:
Income Tax Assessment Act 1997 section 8-1.
Income Tax Assessment Act 1997 Division 27.
Income Tax Assessment Act 1997 Division 35.
Income Tax Assessment Act 1997 Division 40.
Income Tax Assessment Act 1997 Division 42.
Income Tax Assessment Act 1997 section 43-10.
Income Tax Assessment Act 1997 Division 328.
Income Tax Assessment Act 1997 Division 387.
Income Tax Assessment Act 1936 section 82KL.
Income Tax Assessment Act 1936 section 82KZM.
Income Tax Assessment Act 1936 section 82KZMA.
Income Tax Assessment Act 1997 section 82KZMB.
Income Tax Assessment Act 1936 section 82KZMC.
Income Tax Assessment Act 1936 section 82KZMD.
Income Tax Assessment Act 1936 Part IVA.
WHAT THIS RULING IS ABOUT:
1. Will the management fees and capital expenses incurred in the 2000-01 income year be deductible expenses?
2. Will the management fees and capital expenses incurred in the 2001-02 income year be deductible expenses?
3. Will the management fees and capital expenses incurred in the 2002-03 income year be deductible expenses?
4. Will section 82 KZM of the Income Tax Assessment Act 1936 (ITAA 1936) apply to defer all or part of the deductions available to the rulee in respect of the expenditure incurred on the Project for the 2000-01, 2001-02 and 2002-03 income years?
5. Will the Commissioner exercise his discretion under section 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2000-01, 2001-02 and 2002-03 income years?
6. Will Part IVA of the ITAA 1936 apply to deny all or part of the deductions available to the rulee in respect of the expenditure incurred in this Project?
7. Will section 82KL of the ITAA 1936 apply to deny all or part of the deductions available to the rulee in respect of the expenditure incurred in this Project?
SUBJECT OF THE RULING:
Arrangement
The rulee entered into the arrangement on or before 30 June 2001 and has subscribed to more than one stapled interest. The rulee is a small business taxpayer for the 2000-01 income year and has elected to be in the STS for the 2001-02 and 2002-03 income years.
In this ruling, the arrangement is referred to as the Project and incorporates the following documents.
· Application for a Private Binding Ruling
· A Prospectus for the Project
· A Vineyard Agreement
· A Grape Sale Agreement
· A Management Agreement
· Licence Agreements
· Various correspondence between the Rulee's representatives and the Tax Office.
The rulee has entered into the Project for the purpose of developing a vineyard and for growing grapes to be made into wine by A Ltd. The rulee has entered into a Vineyard Agreement with the Project Manager and A Ltd.
Under the Vineyard Agreement, the rulee has incurred fees for the Project.
The management fees for each year have been paid by 30 June of each year however the management services to be provided for each fee have been carried out in the year following the year of payment. The management fees have been prepaid for each year.
The Project Manager maintains a register of participants in the Project.
Interest in Land
The rulee obtains a proportionate interest in the Project land in proportion to the number of interests held in the Project.
A Vineyard Agreement has been entered into between the Project Manager, A Ltd and the rulee. The rulee has contracted with the Project Manager to establish and maintain their vineyard for the duration of the Project. In consideration of the Project Manager agreeing to carry out the management services, the rulee has agreed to pay management fees for the term of the Project. An amount has been paid in advance for the first three years of the Project.
After the commencement of the Project, the Project Manager was obliged to plant rootstock on the Project vineyard, erect and maintain fencing to protect the vines, prevent soil degradation, provide drainage, erect trellises, provide fertilisers, eradicate pests and weeds, effect and maintain insurance and to do all necessary things to conduct the Project in a commercial manner in keeping with accepted wine industry standards.
The vines were planted on the rulee's vineyard by the Project Manager and the grapes on the rulee's vineyard will be harvested by the Project Manager and sold to A Ltd on the rulee's behalf.
The rulee has entered into a Grape Sale Agreement with A Ltd. Under the terms of the Agreement, the rulee agrees to sell their grapes to A Ltd. A Ltd has agreed to pay a commission on wine sales from wine produced from grapes grown on the rulee's vineyard.
Licences
Under a Licence and a Sub-licence Agreement, the Project Manager is permitted to grow grapes on the rulee's vineyard on the rulee's behalf.
RULING:
1. Will the management fees and capital expenses incurred in the 2000-01 income year be deductible expenses?
Yes.
2. Will the management fees and capital expenses incurred in the 2001-02 income year be deductible expenses?
Yes.
3. Will the management fees and capital expenses incurred in the 2002-03 income year be deductible expenses?
Yes.
4. Will section 82 KZM of the ITAA 1936 apply to defer all or part of the deductions available to the rulee in respect of the expenditure incurred on the Project for the 2000-01, 2001-02 and 2002-03 income years?
No.
5. Will the Commissioner exercise his discretion under section 35-55(1)(b) of the ITAA 1997 for the 2000-01, 2001-02 and 2002-03 income years?
Yes, the discretion will be exercised for the 2001 to 2003 years.
6. Will Part IVA of the ITAA 1936 apply to deny all or part of the deductions available to the rulee in respect of the expenditure incurred in this Project?
No.
7. Will section 82KL of the ITAA 1936 apply to deny all or part of the deductions available to the rulee in respect of the expenditure incurred in this Project?
No.
EXPLANATION: (This does not form part of the Notice of Private Ruling)
For the amounts incurred to constitute allowable deductions, the rulee's viticulture activities as a participant in the Project must amount to the carrying on of a business of primary production. These viticulture activities will fall within the definitions of 'horticulture' and 'commercial horticulture' in section 40-535 of the ITAA 1997.
For schemes such as that of the Project, Taxation Ruling TR 2000/8 sets out in paragraph 89 the circumstances in which the rulee's activities can constitute the carrying on of a business. As Taxation Ruling TR 2000/8 sets out, these circumstances have been established in court decisions such as FC of T v. Lau 84 ATC 4929; (1984) 16 ATR 55.
Generally, the rulee will be carrying on a business of viticulture, and hence primary production, if:
· The rulee has an identifiable interest in the land on which your Grapevines are established
· The rulee has a right to harvest and sell the grapes each year from those Grapevines
· The viticulture activities are carried out on your behalf
· The rulee's viticulture activities are typical of those associated with a viticulture business, and
· The weight and influence of general indicators point to the carrying on of a business.
In this Project, the rulee has entered into a Vineyard Agreement with the Project Manager.
The Agreement allows the Manager to come onto the rulee's land to carry out its obligations under the Agreement.
Under the Agreement, the rulee has engaged the Manager to establish and maintain a vineyard on their identifiable area of land during the term of the Project. The Manager has provided evidence that it holds the appropriate professional skills and credentials to provide the management services to establish and maintain the vineyard on your behalf.
In establishing the vineyard, the rulee has engaged the Manager to purchase and install trellising and water facilities (for example, irrigation) and to acquire and plant vine seedlings/rootlings on their vineyard. During the term of the Project, these assets will be used wholly to carry out the rulee's viticulture activities. The Manager is also engaged to harvest and sell, on their behalf, the grapes grown on their vineyard.
The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11. Positive findings can be made from the Project's description for all the indicators.
The activities that will be regularly carried out during the term of the Project demonstrate a significant commercial purpose. Based on reasonable projections, a participant in the Project will derive assessable income from the sale of their grapes that will return a before-tax profit, that is, a profit in cash terms that does not depend in its calculation on the fees in question being allowed as a deduction.
The pooling of grapes grown on the rulee's vineyard with the grapes of other participants in the Project is consistent with general viticulture practices. The rulee's proportionate share of the sale proceeds of the pooled grapes will reflect the proportion of the grapes contributed from your vineyard.
The Manager's services and the installation of assets on your behalf are also consistent with general viticulture practices. The assets are of the type ordinarily used in carrying on a business of viticulture. While the size of the rulee's vineyard is relatively small, it is of a size and scale to allow it to be commercially viable. (see Taxation Ruling IT 360).
The rulee's degree of control over the Manager as evidenced by the Vineyard Agreement, and supplemented by the Corporations Act, is sufficient. During the term of the Project, the Manager will provide the rulee with regular progress reports on their vineyard and the activities carried out on their behalf. The rulee is able to terminate arrangements with the Manager in certain instances, such as cases of default or neglect.
The viticulture activities, and hence the fees associated with the rulee's procurement, are consistent with an intention to commence regular activities that have an 'air of permanence' about them. For the purposes of this Ruling, the rulee's viticulture activities in the Project will constitute the carrying on of a business.
Consideration of whether the initial Management Fees are deductible under section 8-1 of the ITAA 1997 begins with the first limb of the section. This view proceeds on the following basis:
· the outgoing in question must have a sufficient connection with the operations or activities that directly gain or produce the taxpayer's assessable income
· the outgoings are not deductible under the second limb if they are incurred when the business has not commenced, and
· where all that happens in a year of income is that a taxpayer is contractually committed to a venture that may not turn out to be a business, there can be doubt about whether the relevant business has commenced, and hence, whether the second limb applies. However, that does not preclude the application of the first limb in determining whether the outgoing in question has a sufficient connection with activities to produce assessable income.
The Management Fees associated with the viticulture activities will relate to the gaining of income from your business of viticulture (see above), and hence have a sufficient connection to the operations by which income (from the regular sale of grapes) is to be gained from this business. They will thus be deductible under the first limb of section 8-1 of the ITAA 1997. Further, no 'non-income producing' purpose in incurring the fee is identifiable from the arrangement. The fee appears to be reasonable. No capital component of the Management Fee can be identified. The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply.
The prepayment provisions contained in Subdivision H of Division 3 of Part III of the ITAA 1936 affect the timing of deductions for certain prepaid expenditure. These provisions apply to certain expenditure incurred under an agreement in return for the doing of a thing under the agreement (for example, the performance of management services or the leasing of land) that will not be wholly done within the same year of income as the year in which the expenditure is incurred. If expenditure is incurred to cover the provision of services to be provided within the same year, then it is not expenditure to which the prepayment rules apply.
Expenditure that the rulee incurs in this Project that is otherwise deductible under section 8-1 of the ITAA 1997 falls within sections 82KZME and 82KZMF of the ITAA 1936. Unless one of the statutory exceptions applies, if the requirements of section 82KZME of the ITAA 1936 are met, section 82KZMF of the ITAA 1936 operates to set the amount and timing of deductions for expenditure that a taxpayer incurs in a year of income. Effectively, these provisions apportion the allowable tax deductions over the period during which the prepaid benefits will be provided.
This Project is an arrangement to which Exception 5 (subsections 82KZME(9), 82KZME(10) and 82KZME(11) of the ITAA 1936) applies. Because Exception 5 applies, sections 82KZME and 82KZMF of the ITAA 1936 do not apply to set the amount and timing of expenditure incurred by the rulee in the Project. Expenditure incurred for the doing of a thing not to be wholly done within the expenditure year will therefore, be determined under section 82KZM of the ITAA 1936 for a 'small business taxpayer'
A 'small business taxpayer' is defined in section 960-335 of the ITAA 1997 as a taxpayer who is carrying on a business and either their 'average turnover' for the year is less than $1,000,000 or their turnover recalculated under section 960-350 of the ITAA 1997 is less than $1,000,000.
'Average turnover' is determined under section 960-340 of the ITAA 1997 by reference to the average of the taxpayer's 'group turnover'. The group turnover is the sum of the 'value of business supplies' made by the taxpayer and entities connected with the taxpayer during the year (section 960-345 of the ITAA 1997).
Application of Prepayment Provisions
Under the Vineyard Agreement the Annual Management Fees are for things to be done beyond 30 June in the year in which the relevant amounts are incurred.
The provisions are subject to the 'excluded expenditure' exception. For the purpose of this Ruling 'excluded expenditure' refers to an amount of expenditure of less than $1,000.
In this Project, an initial management fee has been incurred on entry into the Project in the 2000-01 income year. Under an Agreement, annual management fees have been incurred in the following two years. These fees have been charged for providing management services that have been carried out in the years following the year of payment of the fee. As such, they have been prepaid and will be subject to the prepayment provisions of section 82KZM of the ITAA 1936.
MANAGEMENT FEES FOR THE 2000-01 INCOME YEAR.
Section 82KZM of the ITAA 1936 operates to spread over more than one income year a deduction for prepaid expenditure that would otherwise be immediately deductible, in full, under section 8-1 of the ITAA 1997. The section applies if certain expenditure incurred under an agreement is in return for the doing of a thing under the agreement that is not wholly done within 13 months after the day on which the expenditure is incurred.
Under the Vineyard Agreement, the initial Management Fee has been incurred upon execution of the Agreement. This fee was charged for providing services to the rulee for a period of 13 months from the date of execution of the Agreement. For this Ruling's purposes, no explicit conclusion can be drawn from the arrangement's description that the fee has been inflated to result in reduced fees being payable for subsequent years. The fee is expressly stated to be for a number of specified services. No explicit conclusion can be drawn from the arrangement's description that the fee has been inflated to result in reduced fees being payable for subsequent years.
Thus, for the purposes of this Ruling, it is accepted that no part of the initial Management Fee is for the Project Manager to do 'things' that were not wholly done within 13 months of the fee being incurred. On this basis, the basic precondition for the operation of section 82KZM of the ITAA 1936 has not been satisfied and it will not apply to the expenditure for the Management Fee by the rulee as a 'small business taxpayer'.
Accordingly, the initial management fee incurred in the 2000-01 income year is deductible in the 2000-01 income.
MANAGEMENT FEES FOR THE 2001-02 AND 2002-03 INCOME YEARS.
The rulee has also paid management fees in the 2001-02 and the 2002-03 income years and the rulee has elected to be in the STS for these years.
Where an 'STS taxpayer' pays Management Fees in the relevant income years shown in the Vineyard Agreement and the eligible service period is not longer than 12 months and doesn't end more than 12 months after the end of the income year in which the expenditure is incurred, those fees are deductible in full in the year that they are paid.
The 'eligible service period' is defined in subsection 82KZL(1) of the ITAA 1936 and means the period during which the thing under the agreement is to be done. The eligible service period begins on the day on which the thing under the agreement commences to be done or on the day on which the expenditure is incurred, whichever is the later, and ends on the last day on which the thing to be done under the agreement ceases to be done, up to a maximum of 10 years.
The management fees have been paid on or before 30 June in the year in which they have been incurred. The eligible service period is a 12 month period which runs from 1 July to 30 June of the year following the year in which the payment is made.
Therefore, as the eligible service period is not longer than 12 months and doesn't end more than 12 months after the end of the income year in which the expenditure is paid, the management fee paid in the 2001-02 income year is deductible in the 2001-02 income year and the fee paid in the 2002-03 income year is deductible in the 2002-03 income year.
Any part of the expenditure the rulee incurs in entering into the viticulture business that is attributable to acquiring an asset or advantage of an enduring kind, is generally capital or capital in nature and will not be an allowable deduction under section 8-1 of the ITAA 1997. It is apparent from the Project's Agreements that certain payments made are attributable to the acquisition of capital assets. These include the costs of preparation of the ground and establishment of the vines, the erection and establishment of items, such as trellising and irrigation, to support and water the vines and the construction of buildings and amenities to support the whole activity. However, expenditures of this nature can fall for consideration under specific deduction provisions relevant to the carrying on of a primary production business, and under the general depreciation and building write-off provisions of the ITAA 1997.
The Vineyard Agreement identifies the relevant expenditures incurred by the rulee that are of a capital nature.
CAPITAL EXPENDITURE IN THE 2000-01 INCOME YEAR
Section 387-125 of the ITAA 1997 allows a taxpayer, who is carrying on a primary production business on land in Australia, to claim a deduction in the 2000-01 income year for capital expenditure on conserving or conveying water. It applies to plant or a structural improvement primarily or principally used for the purpose of conserving or conveying water for use in a primary production business. The deduction is calculated on the basis of one third of the capital expenditure in the year in which the expenditure is incurred and one third in each of the following two years of income.
The rulee's activities in the Project amount to a primary production business and it is a business conducted on land in Australia. The water facilities acquired under the Vineyard Agreement will be for use in this business. The requirements of Subdivision 387-B of the ITAA 1997 have thus been met.
Accordingly, one-third of the fee paid in the 2000-01 income year for this expense is deductible in the 2000-01 income year.
Establishment of grapevines
The capital costs of establishing grapevines can be written off in the 2000-01 income year under Subdivision 387-D of the ITAA 1997. As the rulee is the 'owner' of the vines for the purposes of these 'write-off' provisions, the costs are deductible to the rulee under section 387-305 of the ITAA 1997.
The write-off commences from the time the vines are planted in the ground. The write-off rate is 25% per annum, over four years, of the establishment expenditure. This amount must be apportioned, based on the number of days in the year in which the vines are owned by the rulee. Thus, where the vines are planted part-way through the income year, the write-off period will extend over five income years, with the deduction being pro-rated in the first and last years.
In this Project, the Project Manager has advised that the vines were planted in the 2001-02 income year and therefore no deduction under this item is available for the 2000-01 income year.
Under section 42-15 of the ITAA 1997, a taxpayer can deduct an amount for depreciation of a unit of plant used for the purpose or purposes of producing assessable income where they are the owner or quasi-owner of that plant. Where an item is affixed to land so that it becomes a fixture, at common law it becomes part of the land and is legally, absolutely owned by the owner of the land.
The depreciation deduction depends on the cost of the trellising and the number of days the trellising was owned by the rulee during the income year. It also depends on the extent to which the trellising is installed ready for use during the year.
For this Project, the Project Manager has advised that the trellising was installed in the 2001-02 income year. Therefore, as the trellising was not installed ready for use in the 2000-01 income year, there is no deduction available for trellising in the 2000-01 income year.
Under the Vineyard Agreement, the rulee has incurred expenditure on the construction of sheds and other buildings for use in the vineyard business. If the expenditure is incurred in relation to a construction expenditure area (section 43-75 of the ITAA 1997), it may be written off at 2.5% per annum from the date the relevant construction is completed.
The Project Manager has advised that the identified construction area was completed in the 2001-02 income year. Therefore, there is no deduction available under this item for the 2000-01 income year.
CAPITAL EXPENDITURE FOR THE 2001-02 AND 2002-03 INCOME YEARS
The capital expenditure in the 2001-02 and 2002-03 income years falls for consideration under Division 40 or Division 328 of the ITAA 1997.
The application and extent to which the rulee can claim deductions under Division 40 and Division 328 of the ITAA 1997 depends on whether or not the rulee is an 'STS taxpayer'.
As the rulee is an STS taxpayer, the following provisions apply for the capital expenditure for the 2001-02 and 2002-03 income years.
Under Division 328 of the ITAA 1997, if the 'cost' of a 'depreciating asset' at the end of the income year is less than $1,000 (a 'low-cost asset'), it can be claimed as an immediate deduction when first used or 'installed ready for use'. This is so provided the rulee is an 'STS taxpayer' for the income year in which the rulee starts to 'hold' the asset and the income year in which the rulee first uses the asset or have it 'installed ready for use' to produce assessable income.
Trellising expenditure
Trellising is a 'depreciating asset'. As the cost the rulee has incurred for the trellising exceeds the $1,000 limit, it will not be a 'low cost asset'.
The rulee's interest in the trellising is a 'depreciating asset' that can be allocated to a 'general STS pool'. The 'cost' of the asset is the amount the rulee has paid. For trellising allocated to a 'general STS pool', the tax deduction allowable is determined in the 2001-02 income year by multiplying the 'cost' of the interest by half the 'general STS pool rate, that is, 15%. The rulee's interest in the trellising is allocated to the rulee's 'general STS pool' at the end of the 2001-02 income year and that part of the 'cost' not deducted in the first year is added to the pool balance. In subsequent years, the full pool rate of 30% will apply.
Accordingly, the rulee is entitled to a deduction for this expenditure for the 2001-02 and the 2002-03 income years.
Irrigation expenditure
Any irrigation system, dam or bore is a 'water facility' as defined in subsection 40-520(1) of the ITAA 1997, being used primarily and principally for the purpose of conserving or conveying water. A deduction is available for capital expenditure on water facilities under Subdivision 40-F, paragraph 40 515(1)(a) of the ITAA 1997. This deduction is equal to one third of the capital expenditure incurred on the installation of the 'water facility', in the year in which it is incurred and one third in each of the next two years of income (section 40-540 of the ITAA 1997). The rulee has made payments for water facilities in the 2000-01 and 2001-02 income years.
Accordingly, the rulee is entitled to a deduction for one-third of the amount paid in the 2000-01 income year plus one-third of the amount paid in the 2001-02 income year in each of the 2001-02 and 2002-03 income years.
Establishment of Grapevines
As the rulee is the owner of the grapevines for the purposes of these write-off provisions, the Grapevines are eligible for the 4 year write-off under section 40-550 of the ITAA 1997. The write-off commences from the time the vines are planted in the ground by the rulee. The write-off rate is 25% per annum, over four years, of the establishment expenditure. This amount must be apportioned, based on the number of days in the year in which the rulee owned the vines. Thus, where the vines are planted part-way through the income year, the write-off period will extend over five income years, with the deduction being pro-rated in the first and last years.
The Project Manager has advised that the vines were planted in the 2001-02 income year and therefore a proportion of the deduction is available for the 2001-02 income year. Accordingly, the rulee is entitled to a deduction for this expenditure for the 2001-02 and the 2002-03 income years.
Under the Vineyard Agreement, the rulee has incurred expenditure on the construction of sheds and other buildings for use in the vineyard business. If the expenditure is incurred in relation to a construction expenditure area (section 43-10 of the ITAA 1997), it may be written off at 2.5% per annum from the date the relevant construction is completed.
The Project Manager has advised that the identified construction area was completed in the 2001-02 income year. Accordingly, the rulee is entitled to a deduction for this expenditure for the 2001-02 and the 2002-03 income year.
Under the rule in subsection 35-10(2) of the ITAA 1997 a deduction for a loss incurred by an individual (including an individual in a general law partnership) from certain business activities will not be allowable in an income year unless:
· the 'Exception' in subsection 35-10(4) applies;
· one of four objective tests in sections 35-30, 35-35, 35-40 or 35-45 is met; or
· if one of the objective tests is not satisfied, the Commissioner exercises the discretion in section 35-55.
Generally, a loss in this context is, for the income year in question, the excess of an individual taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.
Losses that cannot be claimed as a tax deduction because of the rule in subsection 35-10(2) of the ITAA 1997 are able to be offset to the extent of future profits from the business activity, or are quarantined until one of the objective tests is passed.
In broad terms, the objective tests require:
(a) at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)
(b) the business activity results in a taxation profit in 3 of the past 5 income years (including the current year)(section 35-35 of the ITAA 1997)
(c) at least $500,000 of real property is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or
(d) at least $100,000 of certain other assets are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).
By participating in the Project, the rulee is carrying on a business activity that is subject to these provisions. Information provided with the application shows that the rulee is unlikely to pass one of the objective tests in the years covered by this Ruling.
Therefore, during this period, unless the Commissioner exercises an arm of the discretion under paragraphs 35-55(1)(a) or 35-55(1)(b) of the ITAA 1997, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from the rulee's participation in the Project.
The first arm of the discretion in paragraph 35-55(1)(a) of the ITAA 1997 relates to 'special circumstances' applicable to the business activity, and has no relevance in the rulee's circumstances. However, the exercise of the second arm of the discretion in paragraph 35-55(1)(b) of the ITAA 1997 is appropriate for the rulee's circumstances.
The second arm of the discretion in paragraph 35-55(1)(b) of the ITAA 1997 may be exercised by the Commissioner where:
(i) the business activity has started to be carried on; and
(ii) there is an objective expectation that the business activity of an individual taxpayer will either pass one of the objective tests or produce a taxation profit within a period that is commercially viable for the industry concerned.
Under paragraph 35-55(1)(b) of the ITAA 1997 the Commissioner has decided for the 2000-01 to 2002-03 income years that the rule in section 35-10 of the ITAA 1936 does not apply to this activity provided that the Project is carried out in the manner described in this Ruling.
This means that the rulee will not be required to defer any excess of deductions attributable to the rulee's business activity in excess of any assessable income from that activity, that is, any 'loss' from that activity, to a later year. Instead, this 'loss' can be offset against other assessable income for the year in which it arises.
In deciding that the second arm of the discretion in paragraph 35-55(1)(b) of the ITAA 1997 will be exercised on this conditional basis, the Commissioner has relied upon:
· the independent Viticultural Report; and
· the binding Grape Sale Agreement between the rulee and the Winemaker for the sale of the grapes setting out prices that realistically reflect the existing market and/or the projected market in the geographical region where the grapes are grown.
The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. For the Project, no conclusion can be drawn that the rulee's participation has resulted, or will result, in the rulee obtaining any 'additional benefits' that will trigger 82KL of the ITAA 1936. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997.
For Part IVA of the ITAA 1936 to apply there must be a 'scheme' (section 177A of the ITAA 1936), a 'tax benefit' (section 177C of the ITAA 1936), and a dominant purpose of entering into or carrying out the scheme to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme (section 177D of the ITAA 1936).
The Project will be a 'scheme'. In entering the scheme, the rulee will obtain a 'tax benefit' in the form of the deductions for the amounts indicated in this Ruling that would not have been obtained but for the scheme. However, it is not possible to conclude that the scheme has been entered into or carried out with the dominant purpose of obtaining this tax benefit.
The rulee intends to stay in the scheme for its full term and derive assessable income from the harvesting of the grapes and the sale of the wine. There are no facts that would suggest that the rulee has the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There are no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing with each other at arm's length, or, if any parties are not at arm's length, that any adverse tax consequences result. Further, having regard to the factors to be considered under paragraph 177D(b) of the ITAA 1936 it cannot be concluded, on the information available, that the rulee has entered into the scheme for the dominant purpose of obtaining a tax benefit.
Disclaimer
The Register of Private Binding Advice is published as a public record of the binding advice issued by the ATO. Each piece of advice is based on a specific set of circumstances advised to the ATO and the law in force at the time of the advice, and is considered binding only in respect of the person/s or entity/ies on whose behalf the advice was sought. The Register is a historical record of advice provided, and is not updated to reflect changes in the law, withdrawal of advice or any other change in circumstance. Each piece of advice has been edited to avoid disclosing the identity of the person or entity on whose behalf advice was sought and published advice may therefore not disclose all the relevant facts or circumstances on which the advice was based. For these reasons, advice published in this Register cannot be relied upon as precedent for any other person or entities.