Winery losses cannot offset other income

The AAT has held that it would not be reasonable for the Commissioner to exercise his discretion under s 35-55 of the ITAA 1997 (the non-commercial loss rules) to allow a taxpayer to deduct winery business losses from her other income.

Background

The taxpayer established a vineyard in Western Australia through a joint venture partnership. She applied for a private ruling for the Commissioner to exercise his discretion under s 35-55 to allow her to offset the losses from the winery venture for the income years ending 30 June 2010 to 30 June 2018 against her other income, ie she asked the Commissioner to exercise his discretion in s 35-55(1)(c) to exempt her from the usual rule quarantining losses from non-commercial businesses. The Commissioner declined to make the ruling to exercise his discretion in the taxpayer's favour. He did so on the basis that the vineyard could produce sufficient assessable income in a much shorter time than the taxpayer's projections.

The taxpayer contended that the discretion should be exercised in her favour as she had developed a business plan in consultation with experts and embarked on the venture with a view to a profit. Furthermore, her plan of staggering the planting of the vineyard over several years was based on expert opinion of the most commercially prudent approach.

Decision

The AAT noted that although it was provided with convincing business reasons why the staggered planting approach would make more commercial sense, and evidence that it is common practice within the industry, it did not agree that the discretion should be exercised. It said the test in s 35-55(1)(c)(i) is whether the business, due to its nature, would not produce assessable income greater than deductions during the nine-year period as contended by the taxpayer.

Based on the evidence, the AAT held that vines could be planted and become productive within five years. Therefore, the taxpayer was unable to satisfy s 35-55(1)(c)(i) and the AAT concluded that it would not be reasonable to exercise the discretion in the taxpayer's favour. Consequently, the taxpayer's losses from the winery business were quarantined and she was unable to deduct the winery losses from her other income.

Re Taxpayer and FCT [2013] AATA 3, www.austlii.edu.au/au/cases/cth/AATA/2013/3.html.