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14 Jan 09 Certainty for agricultural managed investment schemes - Hance

On 17 October 2007, the Commissioner issued Taxation Ruling TR 2007/8, in which he ruled, amongst other things, that taxpayers who incur expenditure ("contributions") in connection with Managed Investment Schemes were making contributions of capital, or of a capital nature, which were not deductible under s 8-1 ITAA 1997. In particular, the Commissioner ruled that such taxpayers were not considered to be carrying on business as a result of their membership of the scheme. The Ruling applied to losses or outgoings incurred, and amounts included in assessable income, in relation to schemes begun to be carried out on and after 1 July 2008. However, the Commissioner undertook to bring a test case before the Courts to decide on the correctness of his approach to Managed Investment Schemes. Judgment in the test case has now been delivered by the Full Federal Court.

The Full Federal Court (Finn, Dowsett and Edmonds JJ) has unanimously found for the taxpayers, who proposed to invest in a managed investment scheme (the "Scheme") known as the "2009 AIMA Almond Scheme". The taxpayers sought private rulings from the Commissioner concerning the tax treatment of income to be received, and outgoings to be incurred, in connection with the Scheme. The Commissioner ruled that income from the Scheme would be assessable income, and that certain outgoings (management fees, rent and other fees) would not be deductible. The applicants objected against their respective rulings. Both objections were unsuccessful. The taxpayers appealed to the Court.

On appeal, the Commissioner accepted that the relevant outgoings would be incurred in gaining or producing assessable income and will therefore satisfy the first "positive limb" of s 8-1. However he submitted that the outgoings would be capital, or of a capital nature and therefore not deductible. The Commissioner submitted that the advantage to be sought by each applicant in exchange for such outgoings was the right to share rateably in the proceeds of sale of almonds produced by the Scheme as a whole, which right was a capital asset. Implicit in that submission was the assertion that each applicant should be properly characterized as a "passive investor"; and/or by virtue of the structure mandated by Chapter 5C of the Corporations Act, the manager (and not the taxpayers) is carrying on the business of almond production for the benefit of Growers as beneficiaries of a trust.

In contrast, the taxpayers submitted that:

  • they will each be carrying on a business for the purpose of gaining or producing assessable income;
  • nothing in Chapter 5C of the Corporations Act compels the adoption of a trust as the mechanism for carrying on the business of a managed investment scheme;
  • the Commissioner has not identified any trust estate; and
  • the relevant outgoings are in categories which would not normally be classified as being on capital account.
After analysing the facts and cases, the Court concluded that each taxpayer would be carrying on an individual business with the purpose of producing almonds for sale at a profit (para 90). The Court then said, at para (1:

"Our conclusion that each applicant will be conducting a business from which the relevant assessable income will be derived effectively rebuts the Commissioner’s contention that the outgoings will be capital or in the nature of capital. That latter contention is predicated on a conclusion that what the applicants are acquiring in making the relevant outgoings is a ‘passive investment’ in the form of a right to share rateably in the income of the Scheme (net of costs and expenses) and that right is a capital asset. But such a conclusion is not open if an applicant incurs the relevant outgoings in the course of carrying on a business."

Finally, the Court rejected the Commissioner's submission that the taxpayers acquired an interest in a trust in exchange for the relevant outgoings. It followed that the relevant outgoings would be incurred as operating expenses in carrying on each applicant’s business and that they would be deductible pursuant to s 8-1 ITAA 1997: Hance v FCT [2008] FCAFC 196 (Full Federal Court; Finn, Dowsett and Edmonds JJ;19 December 2008).

In a media release issued on 19 December 2008, the Commissioner, Michael D’Ascenzo, noted the Federal Court's decision, which he said "clarified the law in relation to deductions for contributions to registered agricultural managed investment schemes (MIS)."

In light of the Federal Court’s decision, the ATO will withdraw its current income tax ruling and draft GST rulings on this topic and will work with industry to finalise 2009 product rulings as soon as possible.

“We offered arrangements to stockpile these product ruling applications so that they could be finalised quickly after the decision is handed down. We will now work to finalise the five applications on hand,” Mr D’Ascenzo said.

A new income tax ruling will be published in the new year. The Commissioner expects to release a decision impact statement shortly, and says "we do not expect to lodge a request for special leave to appeal the case."

For a copy of the decision, go here.

For a copy of the ATO media release, No 2008/61, 19 December 2008, go here.

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