Southern Estates Pty Ltd v. Federal Commissioner of Taxation

(1967) 117 CLR 481
41 ALJR 270

(Judgment by: Taylor, Owen JJ.)



Judges: McTiernan J.
Barwick C.J.

Taylor, Owen JJ.

Judgment date: 2 June 1967

Judgment by:
Taylor, Owen JJ.

TAYLOR AND OWEN JJ. These appeals are brought against orders made by MCTiernan J. dismissing appeals by the taxpayer (hereinafter called the company) against assessments for the years ending 30th June 1961 and 30th June 1963. (at p489)

In November 1958 one Ashby Francis Smith, who over a number of years had been a buyer and seller of land and had also been employed as a land salesman, purchased about 7,600 acres of virgin scrub country near Naracoorte in the south east of South Australia. In October 1959 he formed the company, he and members of his family being its shareholders. The memorandum and articles of association of the company are not reproduced in the appeal book but it is apparent that one of the company's objects was to carry on the business of buying and selling land and in fact during the relevant period it had a number of dealings of this description. In March 1960 Smith transferred the title to the Naracoorte land to himself and the company and they entered into a partnership agreement under which they agreed to carry on the business of pastoralists and graziers on it, Smith being the controlling partner. In its virgin state the land was covered with indigenous scrub, there was no water on it and little fencing. In its then state it was useless for primary production and would remain so until such time as a substantial area of it had been cleared, ploughed, sown to pasture and the pasture had grown sufficiently to graze sheep and cattle on it. Soon after Smith completed the purchase he began to clear the scrub and after the partnership was formed the work of improving the land to fit it for the grazing of stock was continued. In the years in question in these appeals substantial expenditure was incurred by the partnership in destroying and removing scrub and ploughing and sowing the land to pasture grasses. Although no express finding to this effect was made by McTiernan J., it seems to be clear from Smith's evidence that his purpose in buying the land was to improve it to the stage when it would be capable of being used for grazing purposes and then to use it for that purpose until it could be sold at a profit.

That resale at a profit was the ultimate purpose of buying and improving the land is made clear by a statement of expenditure attached to the partnership income tax return for the year ending 30th June 1962 headed "Property Development Expenses - Property bought for profit making by sale". While work on the land was in progress, however, and before it was sufficiently advanced to allow the land to be stocked, Smith became seriously ill and this made it necessary to sell the land. The price obtained was in excess of that paid for the land by Smith but, when the expenditure on improvements was taken into account, a substantial loss was shown and the company's share of this loss was claimed by it and allowed as a deduction under s. 52 of the Act. (at p490)

The company claimed in addition that its share of the partnership expenditure during the years in question in destroying the scrub and ploughing and seeding the land was an allowable deduction under s. 75 (1)(b) and (e) of the Act. Those paragraphs provide that :

"Expenditure incurred in the year of income by a taxpayer engaged in primary production on any land . . . in . . .

. . . .
the destruction and removal of timber, scrub or undergrowth indigenous to the land;
. . . .
ploughing and grassing the land for grazing purposes;
. . . .

shall be an allowable deduction."

The definition of the words "primary production" in s. 6 is:

"production resulting directly from -

the cultivation of land;
the maintenance of animals or poultry for the purpose of selling them or their bodily produce, including natural increase;
fishing operations;

. . . ."

But this definition, which is really directed to defining what constitute primary products, seems to throw little light upon the question which arises in the present appeals. (at p491)

The Commissioner refused to allow the deductions claimed and McTiernan J. held that he was right in doing so. We think his Honour's conclusion was correct. Section 75 (1) proceeds upon the basis that at the time when the expenditure is incurred the taxpayer is actually engaged in carrying on the business of a primary producer on the land upon which the improvements are effected. But where, as here, the land is, at the time when the expenditure is incurred, incapable of being used for primary production and the expenditure in incurred in order to bring it into a condition in which it will be possible to use it for primary production we are of opinion that it cannot be said that the taxpayer is engaged in primary production on that land. If, as was the case here, the real or substantial purpose of incurring the expenditure was to make the land capable of being used for primary production in order to resell it at a profit, s. 75 (1) has, in our opinion, no application. The sub-section is not designed to benefit a taxpayer who buys land which, as it stands, cannot be used for primary production and expends money upon improvements to it so that he may resell it to the best advantage when it is in, or approaching, a state in which it can be used for that purpose. Its purpose is to benefit a taxpayer who, at the time he incurs the expenditure, is himself engaged in primary production on the land. (at p491)

We would therefore dismiss the appeals. (at p491) (at p491)