In a recent decision, the Administrative Appeals Tribunal (AAT) disallowed deductions relating to a scheme involving a wine grape project.

Readers will be aware from previous editions that the Commissioner is seriously clamping down on tax effective investment schemes that are thinly disguised as providing taxpayers with a commercial benefit.

In this case, the taxpayer sought to claim ‘excessive’ deductions for a small amount of capital outlay through a series of ‘round robin’ financing arrangements, which the Commissioner argued served no commercial purpose other than to generate large upfront fees.

The AAT agreed with the Commissioner in applying Part IVA to the scheme, concluding that the taxpayer entered into the scheme with the sole or dominant purpose of obtaining a tax benefit, regardless of whether or not there were genuine commercial objectives.

Commissioner’s Discretion — Non-commercial Losses

Tax Effective Investment Schemes

The Tax Office recently released a draft ruling providing guidelines on how the Commissioner’s discretion, contained in the non-commercial loss provisions, may be exercised.

The non-commercial loss provisions prevent taxpayers from offsetting losses generated from a non-commercial business activity (e.g. a hobby farm) against the taxpayer’s other assessable income.

There are four tests that apply to determine if a loss can be considered a business loss and hence deductible against the taxpayer’s other income.

In addition to these tests, there is also a provision that allows the Commissioner to exercise his discretion in circumstances where he determines it would be unreasonable to defer the loss.

The ruling indicates that the Commissioner may exercise his discretion in the following circumstances:

· special circumstances: the business activity has been affected by special circumstances outside of the taxpayer’s control, specifically including: flood, drought or natural disaster;

· nature of business: an inherent characteristic of the business would necessarily cause the taxpayer to fail one of the tests mentioned above; and

· objective expectation: there is an objective expectation that during a commercially viable period of time, the activity will meet one of the four tests.

Maxim Group

March 2007

Volume 2, Issue 2

Maxim Insight

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