21 Jan 1313 Vineyard deductions deferred
The AAT has upheld the Commissioner's objection decision in relation to the Commissioner's refusal to exercise the discretion conferred upon him by s 35-55(1) of ITAA 1997 (deferral of losses from non-commercial business activities).
The taxpayer was in the course of establishing a vineyard in the Margaret River region of Western Australia. The taxpayer proposed to stagger the planting of her vineyard over several years. She did not want to plant the whole vineyard at once, as she could husband her capital more effectively if the vines she planted first started to produce an income after 3 years. On this approach, the vineyard operation would not reach full production for approximately 10 years, rather than 5 years if all vines were planted immediately.
The taxpayer sought to offset the losses from the venture over the extended period of 10 years against her other income. Division 35 of the ITAA 1997 contains rules preventing a taxpayer from offsetting losses from non-commercial businesses against other income. The taxpayer therefore applied to the Commissioner for a private ruling, requesting the favourable exercise of his discretion under s 35-55(1). The Commissioner refused.
The AAT held that the taxpayer was unable to satisfy the first leg of the test in s 35-55(1)(c), namely, that "because of its nature, [the business activity] has not produced, or will not produce, assessable income greater than the deductions attributable to it" over the extended period.
The AAT concluded:
"Vines can be planted and become productive within 5 years. The applicant has chosen to take a more gradual approach. No one quibbles with the wisdom of her decision, and I am told it is a common practice in the industry. But she is unable to satisfy the first leg of the test in s 35-55(1)(c). In those circumstances, it would not be reasonable to exercise the discretion in her favour."
The Taxpayer and FCT  AATA 3 (8 January 2013).