My past is catching up with me and as my favourite tax law student, I need your tax advice! Up until a few years ago, I lived in a rural area and owned a 10 acre property. Even though my job was as a full time university lecturer just like now, every moment of my spare time was spent on my property, which I purchased with the sole intention of giving my two boys the experience of growing up in the country. I always enjoyed gardening and before long I had an enormous fruit and vegetable garden. Below are photos of some of my early harvests!
During my first three years, I would give away excess produce to my neighbours, friends, and family. Sometimes they would pay me a nominal amount for my produce that would help cover some of the costs. Other times they would give me eggs and other produce from their properties in return for my fruit and vegetables. One friend paid me with movie tickets! I estimate that for the first three years on the property I received $1,000 per year in cash and probably another $2,000 worth of eggs and other produce each year, plus the movie tickets. The value of everything I received was all well short of what I spent on the garden during that period.
In the next two years, I started growing way too much. I would pick buckets of strawberries and wheelbarrows full of cucumbers daily. I didn’t want the produce to go to waste, so I started making jam and wine and all sorts of pickled and preserved fruit and vegetables. I set up a simple website for online ordering and ran a few advertisements on local radio. Every weekend I would sell my fruit and vegetables at local produce markets. The money I would make would cover my costs with just enough to pay the school fees for my children. In fact, my boss at University would pay for anything she bought off me by writing a cheque payable to my children’s school! During these two years I made $10,000 profit each year. That’s not counting the additional $1,000 per year my boss paid direct to the school.
During my last two years on the property demand grew for my great produce. I bought a specialised market garden tractor. I installed a sophisticated automated watering system. I built a big greenhouse for growing crops all year round. I had business cards and professional labels printed for my jars of produce. I installed professional food preserving equipment. I also paid my neighbour, a retired market gardener, to act as my ‘hobby farm manager’ to oversee the operation and keep things running while I did my university job. I continued to sell produce mainly to the local produce markets but at a much larger scale. I also received a one-off payment of $10,000 from a local supermarket in return for signing a contract agreeing not to sell my pumpkins to anybody other than them! But I still just did it all for the love of it. I just love growing fruit and vegetables! I estimate that during this time I made profits of $50,000 per year from my produce sales, plus the $10,000 payment from the supermarket. I also sold my old tractor that I purchased for $20,000 5 years earlier to a local farmer for $12,000. Unfortunately after two years I had to sell my hobby farm and move to the city – and here I am as your Taxation Law lecturer!
But now I have a problem. One of the people who bought some of my strawberry jam was the wife of the grumpy looking guy in the picture below. His name is Chris Jordan and he is the Australian Commissioner of Taxation.
Unfortunately, he and his wife got food poisoning from my jam so he is suing me for $50,000 in damages for poisoning his family. Even worse, he ordered his staff to audit me! Now I have received a Notice of Assessment which says that based on industry benchmarking, I have failed to declare income for the period in which I was growing my fruit and vegetables of $150,000. With interest and penalties the ATO claim I owe them over $100,000 in tax! I never declared any of the money I earned from my little fruit and vegetable hobby and I don’t think I owe them anything.
Please give your legal advice on the following:
1. During my first three years on the property did I earn any assessable income from my gardening activities and, if so, how much?
2. During my second two years on the property did I earn any assessable income from my gardening activities and, if so, how much?
3. During my last two years on the property did I earn any assessable income from my gardening activities and, if so, how much?
4. If I lose the food poisoning case, can I claim a deduction for the $50,000 damages I might have to pay Mr Jordan?
5. If it turns out I do need to pay tax on the income from my fruit and vegetable growing and selling activities, can I reduce the amount I owe by claiming a deduction for the $20,000 in expenses I incurred before I bought the property in engaging an agronomist to advise me on the suitability of the property for large scale commercial fruit and vegetable growing?
In explaining each of your answers, point out any assumptions you have made or any further information you would like from me to support your advice (also keep an eye out for anything in the facts that might indicate I’m not being entirely truthful…) Of course, you also need to mention any cases or legislation you are relying on, just in case I need to take my argument with the ATO to court.