Farmer battles fire, pests, drought and tax
Posted on September 02, 2014
The AAT has considered whether a Doctor, who also owns an olive plantation that has been plagued by problems, is able to offset his farm losses against his other income.
Dr Bentivoglio has operated an olive growing and olive oil production business for 15 years. He has 8000 trees across 125 acres, up to 13 staff and a production and storage facility that houses up to 60,000 litres of olive oil. His olive oil has won a number of national and international awards. Evidently his olive oil did not appeal to everyone, as there have been a number of acts of god against him, including:
- A bushfire that destroyed 500 trees;
- Spot fires from lightning strikes;
- Recurring severe drought;
- A heatwave over a week required to bake the fruit buds on an entire crop;
- A severe infestation of olive lace bug, that did not infect other nearby properties; and
- A hailstorm that destroyed 90% of a crop in 3 minutes.
Like most farmers, Dr Bentivoglio has made losses. His have been much worse than he expected. He wished to offset those losses against his other income. He was prevented from doing so by the ‘non-commercial loss’ rules. These rules are aimed at preventing taxpayers from making losses on ‘hobby businesses’ and thereby reducing their tax.
From the scale of the olive oil business it is clearly not a hobby. However it does not fit within any of the exceptions to the non-commercial losses rules, such as:
- making profits in 3 out of 5 years;
- having more than $500,000in land assets; or
- more than $100,000 in other assets.
The only course open was to apply for the Commissioner’s discretion to be able to offset the losses. Or pray.
The Income Tax Act provides that the Commissioner can exercise his discretion if it would be unreasonable to apply the non-commercial loss provisions because the business was affected by special circumstances beyond the operator’s control, including drought, flood, bushfire or some other natural disaster. That should have been the answer to his prayers. But the Commissioner has interpreted that discretion (in TR 2007/6) to be available only when the taxpayer is able to show that despite the special circumstances the taxpayer would have both made a profit and met one of the exemptions to the non-commercial loss provisions. The application for the Commissioner’s discretion seemed damned, and was rejected by the Commissioner. So Dr Bentivoglio appealed to a higher power.
The Tribunal held that the Commissioner’s discretion is not limited in the way the Commissioner applies it. Instead the text of the Income Tax Act should be followed. The Commissioner must exercise his discretion in favour of the taxpayer if the application of the non-commercial loss provisions would be unreasonable. The Commissioner was rebuked. Some points from this case:
- If the Commissioner has discretion it does not mean that he can decide on a whim to reject exercising it. If the legislative conditions are met, then the Commissioner is bound to exercise his discretion in a taxpayers favour;
- Although a taxation ruling is a safe harbour for taxpayers, it is merely the Commissioner’s interpretation of the law. Before a Court or Tribunal it has no more weight than the taxpayer’s own interpretation; and
- Legislative history and the objects of a particular law cannot displace the meaning of the actual words of the law. Whatever words the parliament uses in legislation are the words that must be applied.
If you would like assistance with obtaining the Commissioner’s discretion, please contact Joe Subic.
