Basten and Ors and Commissioner of Taxation

Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1128
ADMINISTRATIVE APPEALS TRIBUNAL ) No WT2001/1089, No WT2001/1127-1134, ) No WT2001/2351-2352, No WT2001/2896-2897, TAXATION APPEALS DIVISION ) No WT2001/3490-3491, No WT2001/3637, ) No WT2001/3851-3852, No WT2002/67, ) No WT2006/44-45

Re FRANCESCA BASTEN, NICHOLAS BASTEN, SAMANTHA BASTEN,
FRANCISCUS BRUYNINCKS,
ELMER GALLOWAY, CAMERON HOOKER, KERRIDYN HOOKER, LEIGHTON HOOKER, GARY HOPKINS, ROBERT ONG, GRAHAM SAGGERS, PHILLIP SHIELDS

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B.H. Pascoe, Senior Member
Date13 March 2007
PlacePerth

Decision The Tribunal varies the decisions under review to the extent of allowing as a deduction in each of the relevant years so much of the deductions claimed in relation to the Northern Rivers Tea Tree Oil Projects as were represented by actual cash outlays of the applicants which were not of a capital nature with a determination under s 177F of the Income Tax Assessment Act 1936 that the excess over such amounts is not an allowable deduction and the Tribunal remits these matters to the respondent with a direction to issue amended assessments to give effect to this decision.
..........(Sgd Mr B Pascoe)............
Senior Member

INCOME TAX – investment in tea-tree oil farming project – allowable deductions – application of part iva – whether federal court decision can be distringuished – validity of determination under part iva
Income Tax Assessment Act 1936
Sleight v Commissioner of Taxation 2003 ATC 4801
Commissioner of Taxation v Sleight (2004) 136 FCR 211
Fletcher v Commissioner of Taxation (1988) 19 FCR 442
REASONS FOR DECISION

13 March 2007 Mr B.H. Pascoe, Senior Member

1.      These are applications for review decisions of the respondent to disallow objections to amended assessments of income tax in relation to the years ended 30 June 1995, 1996, and 1997. The amended assessments were issued to disallow deductions claimed for expenses incurred in respect of the planting, cultivation and maintenance of a tea-tree farm and the production of tea-tree oil. The claims arose from the participation by the applicants in the project known as the Northern River Tea-Tree Project (the project).
2.      At the hearing consent was given for all applications to be heard together. The applicants were represented by Mr D. Romano, a solicitor and the respondent by Mr D. McGovern SC with Mr A.J. O’Brien of counsel. The evidence relied upon by these applicants was given by Mr N. Simpson, a former farm management consultant and now an authorised financial advisor and by Mr I. Banks, a financial advisory services consultant with KPMG.
3.      The basis of these applications and the submissions made were identical to those set out in the reasons for decision of the Tribunal in RePrinci and Others and Commissioner of Taxation [2007] AATA 1119 other than those which related to a specific investment of $200,000 to which these applicants were not parties. As such the reasons for decision in paragraphs 3-7 and 13-23 apply to these applicants and are adopted in these reasons. These applications were heard by consent concurrently with those of Princi and Others.
4.      In relation to several of the applicants it was submitted that they were cash negative in relation to their investment in the project in that the cash outlays exceeded the amount of tax saved from the deductions claimed. However, I am unable to find that this distinguishes these applicants from the decision in Commissioner of Taxation v Sleight (2004) 136 FCR 211. Whether the result was cash flow positive or negative, the sought for tax deduction and reduction in tax liability substantially funded the investment in the project. As such, I am unable to distinguish these applicants from the findings of Hill J at paragraph 87 and 88 of his decision in Sleight. Whilst I would find that this expected subsidisation of the investment leads to a conclusion that the matters referred to in s 177D(b)(v) suggest a dominant motive was the obtaining of a tax benefit, this is only one factor to be weighed. Having regard to all of the factors in s 177D(b) I am satisfied that, viewed objectively, the dominant motive was the same as in Sleight.
5.      As a consequence of the foregoing and, again, for the reasons fully set out in Princi, the decision should be the same as in that matter.

I certify that the 5 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B H Pascoe, Senior Member.
Signed:         ..........(Ms R Riberi)...........
  Associate
Dates of Hearing  12 - 16 February 2007
Date of Decision  9 March 2007
Counsel for the Applicant         Mr F Wilson
Solicitor for the Applicant          Mr D Romano
Wilson & Atkinson

Senior Counsel for the
Respondent  Mr D M McGovern
Counsel for the Respondent     Mr A J O’Brien
Solicitor for the Respondent     Mr T Burrows
Australian Government Solicitor

CaseChat Overview and Summary

Basten and Ors v Commissioner of Taxation involved the applicants, who were involved in the production and sale of tea tree oil, challenging the Commissioner of Taxation's decisions regarding their tax deductions for expenses incurred in the Northern Rivers Tea Tree Oil Projects. The dispute was heard and determined by the Administrative Appeals Tribunal (AAT). The applicants argued that they were entitled to claim deductions for certain expenses related to the projects, while the Commissioner contended that some of these expenses were of a capital nature and not deductible under the Income Tax Assessment Act 1936.

The legal issues before the AAT included whether certain expenses claimed by the applicants were ordinary and necessary for the purpose of deriving assessable income, and if any of these expenses were capital in nature and therefore not deductible. The Tribunal had to consider the nature of the expenses and whether they were incurred in gaining or producing the income, as well as applying the statutory provisions of the Income Tax Assessment Act 1936.

The AAT found that the applicants were entitled to deductions for actual cash outlays that were not of a capital nature. However, the Tribunal also determined that some of the expenses claimed exceeded the actual cash outlays and were of a capital nature. As a result, the Tribunal varied the decisions under review to allow deductions for the actual cash outlays that were not capital in nature and disallowed deductions for the excess amounts. The Tribunal also directed the Commissioner to issue amended assessments to reflect these findings.

The Tribunal's decision effectively allowed the applicants to claim deductions for certain expenses related to the Northern Rivers Tea Tree Oil Projects, while disallowing deductions for expenses that were determined to be capital in nature. This outcome balanced the applicants' right to claim deductions with the Commissioner's obligation to ensure that only allowable deductions are recognised under the Income Tax Assessment Act 1936.

Orders of the court

The Tribunal varies the decisions under review to the extent of allowing as a deduction in each of the relevant years so much of the deductions claimed in relation to the Northern Rivers Tea Tree Oil Projects as were represented by actual cash outlays of the applicants which were not of a capital nature with a determination under s 177F of the Income Tax Assessment Act 1936 that the excess over such amounts is not an allowable deduction and the Tribunal remits these matters to the respondent with a direction to issue amended assessments to give effect to this decision.

CaseChat Overview and Summary

Orders of the court

Background to the litigation

Evidence Before The Court

Reasons for decision

Legal Principle Established