Successful entrepreneurs are a creative and motivated bunch, but it generally takes several attempts to develop a successful business venture. Costs are quickly incurred in determining the viability of, and in pursuing, a business idea. However, careful consideration of the deductibility of such costs needs to be taken. If the idea is a winner and a new business venture is born, a deduction may be available. However, in other cases, the deduction may not be available.

In one recent case, an individual was unsuccessful before the Federal Court in relation to his claims for deductions incurred in pursuing 14 business ventures on a 500-acre property. The Administrative Appeals Tribunal (AAT) had earlier found that although the man's operations met a number of criteria relevant in determining whether a business was being carried on, none of the activities had advanced much beyond the planning stage.

The AAT held that the individual was not "carrying on a business" and that the claimed deductions were therefore not available. The Federal Court affirmed the AAT's decision.

Given the breadth of examples covered in this decision, the decision is a useful reference point for taxpayers dealing with the issue of deductibility of costs incurred in preparatory activities associated with a business idea that is later abandoned or a business venture not yet generating income. Please contact our office for further details

The Federal Court has dismissed a taxpayer's appeal from the decision in Re Nelson and FCT [2012] AATA 579, in which the Administrative Appeals Tribunal (AAT) confirmed that the taxpayer was not carrying on a business of primary production during the 2004 to 2009 years of income on a 500-acre property in Queensland he had purchased, and that he was therefore not entitled to deductions in respect of improvements he made to the property and other expenses he incurred, including the depreciation of assets.
 
In so finding, the AAT relied primarily on the criteria in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? to find that no business was being carried on despite the taxpayer's genuine intentions to do so in relation to some 14 activities that he proposed to undertake on the property (ranging from aquaculture to cropping, raising free-range pigs and timber growing, as well as raising poultry, maintaining orchards and building cabins for holiday usage, etc). In particular, the AAT found that the operations had not reached the point where they could be characterised as a primary production business because they were still in the preparatory stages in the years in question.
 
On appeal, the taxpayer relied on seven appeal grounds including the questionable reasonableness of the AAT's decision, that the AAT failed to take into consideration his contention that he only carried on a single, core forestry business, and that the AAT had erred in its interpretation and application of principles relevant to "carrying on a business".
 
However, while the Federal Court found that the AAT took a "shorthand" approach to discussion of the relevant law concerning the meaning of "carrying on a business" by relying on the ruling, and that it perhaps should have more closely considered specific legal principles, the Court nevertheless found that it was unable to identify any legal error in the AAT's approach. In short, the Court found that "no criticism of substance can be levelled at the reasoning of the AAT in making detailed reference to the Ruling" the way that it did in the circumstances.

In regard to this matter, the Court found that the AAT was fully cognisant of the task before it; that it recognised that the ruling reflected legal principles articulated in many relevant cases in this area of law; that it realised that it was not required to rigidly adopt the principles explained in the Ruling; and that the case required determination on its peculiar facts. Accordingly, the Court found that it was open to the AAT to conclude that the activities of the taxpayer were preparatory to the carrying on of a business, rather than incidental to the carrying on of a business – particularly as the ruling contains many principles that have been endorsed by the courts to guide determination of whether a taxpayer is, in fact, "carrying on a business".

Appeal update
 
The taxpayer has appealed to the Full Federal Court against the decision.

Nelson v FCT [2014] FCA 57, www.austlii.edu.au/au/cases/cth/FCA/2014/57.html.