Agriculture Case

Not sure exactly where to post this but:

Appeal in viticulture scheme case dismissed


Iddles v FC of T
A taxpayer has lost his appeal in a viticulture scheme case, with the Federal Court confirming that he entered into the scheme for the dominant purpose of obtaining a tax benefit with the result that Pt IVA of ITAA 1936 applied to the scheme.
Facts
In June 1997, the taxpayer was an executive, contemplating retirement in 2000. After telling his stockbrokers that he wanted to look at business opportunities for his impending retirement, he was alerted to a viticulture project.
The prospectus to the project offered passive participation in a winegrape vineyard business by licensing the vineyard to participants (growers) in vineplots of 0.2 of a hectare for 15 years and cultivating the grapes on their behalf, in return for licence and management fees, and buying the grapes from the participants pursuant to a grape sales agreement. The offer included the option of a limited recourse loan to finance the licence and management fees which, if utilised, would enable entry to the project for a cash outflow of only $2,204 before 30 June 1997 while allowing a tax deduction of $17,204 for that year.
On 19 June 1997, the taxpayer entered into the project by making the cash outlay of $2,204, and accepted the loan.
As he was liable to pay licence fees of $1,000, a management fee of $15,000 and pre-paid interest of $1,204, he claimed these amounts, totalling $17,204, as deductions in the 1996/97 year.
For the 1997/98 year, the taxpayer claimed, as deductions, a licence fee of $1,000, a management fee of $10,000 and pre-paid interest of $1,765. For the 1998/99 year, he claimed a licence fee of $1,000, a management fee of $2,872 and pre-paid interest of $2,186.
The Commissioner disallowed all of the deductions claimed on the basis that they were either not deductible under s 51 of ITAA 1936/s 8-1 of ITAA 1997 or struck out by determinations made by him under s 177F(1) of ITAA 1936.
AAT decision
The AAT found that the taxpayer had been conducting a business of growing and selling wine grapes for the purpose of gaining or producing assessable income. It also said that the expenses, including the annual licence and management fees, were not outgoings of capital for the purposes of s 51(1)/s 8-1(2)(a). Accordingly, all of the expenses were deductible.
The AAT then held that, on the balance of the probabilities arising in connection with the relevant matters, the taxpayer entered into the scheme with the prevailing purpose of obtaining the tax benefits and so Pt IVA applied to the scheme. However, Pt IVA only applied to the difference between the amounts claimed by the taxpayer as deductions and the amount of cash payments he was required to make. These amounts were as follows: 1997 — $15,000 ($17,204 − $2,204); 1998 — $7,265 ($12,765 − $5,400); 1999 — $58 ($6,058 − $6,000) (see 2005 ATC 2254).
Federal Court decision
The Federal Court held that, weighing up all the relevant factors, the AAT was entitled to conclude that in relation to the manner in which the scheme was entered into and carried out, the taxpayer’s prevailing purpose was to obtain tax benefits in connection with the scheme.
The court rejected the taxpayer’s argument that the AAT failed to take into account as relevant considerations the fact that the applicant was a man of means, he had a longstanding interest in the viticultural industry and he invested in the project at the minimum level.
Further, the court said that the AAT did not fail to give proper and genuine consideration to the commercial benefits to be derived from the scheme and, in particular, the fact that the prospectus forecast healthy commercial returns.
The court concluded that the AAT did not misstate the law, and the conclusions that it reached were reasonably open to it.
Court ref: [2007] FCA 395 (Besanko J), 23 March 2007, Adelaide (heard in Perth).

 

Thanks Coop. The accounting, tax and legal forum is the place for this thread.

I'll have a look at the decision, but my initial response is "was there a product ruling from the ATO?"

To enter into such a scheme without one would be (to quote Sir Humphrey Appleby) "very courageous"

Sorry if I've missed reference to product ruling - reading this on the blackberry.

N