Southern Estates Pty Ltd v. Federal Commissioner of Taxation
(1967) 117 CLR 48141 ALJR 270
(Judgment by: Windeyer)
SOUTHERN ESTATES PTY. LTD.
v. FEDERAL COMMISSIONER OF TAXATION
Judges:
McTiernan J.
Barwick C.J.
Taylor, Owen JJ.
Windeyer
Judgment date: 2 June 1967
Judgment by:
Windeyer
2. WINDEYER J. I agree that these appeals should be dismissed. But I do not read s. 75 of the Income Tax and Social Services Contribution Assessment Act 1936-1962 as the other members of the Court do. I differ in what seems to me an important aspect. I say important because to say that the section does not extend to expenditure to bring virgin land into a state in whcih it can be used for primary production gives the section a narrow operation and a meaning which differs from that which has, I believe, been hitherto acted upon by the Commissioner, and which has been implicit in decisions of boards of review. The construction of the Act which the Taxation Department has acted on has been made widely known to the public by the booklet, prepared by the Taxation Department and issued under the authority of the Commonwealth Treasurer, called Income Tax for Farmers and Graziers, which is now in its seventh edition. The deductions which under s. 75 a primary producer may claim are there said to be for "expenditure which will bring land into production or improve the productive qualities of land already in use" ; and references are made to buying virgin land and expenditure in clearing and grassing it : see pp. 17-20 of the booklet. Of course these departmental views cannot determine the meaning of the Act or be used as an aid to its interpretation. They show, however, that my view of the meaning and effect of s. 75 is not a mere idiosyncrasy. But first I shall give my reasons for agreeing in the conclusion that these appeals should be dismissed. (at p492)
In my opinion a taxpayer who acquires land for the purpose of profit making by sale, that being his main or dominant purpose, and who expends money upon it with a view to improving it and selling it in an improved state, cannot have the deductions which by s. 75 (1) are allowed to a taxpayer engaged in primary production. Expenditure on land by a taxpayer who has acquired the land in order to sell it is an allowable deduction in ascertaining the amount of any profit realized by him which is brought to tax under s. 26 (a) - and see also s.52. But, as I read the Act, he is not to be permitted to deduct the same amount twice - under s. 75 and also for the computation of a s. 26 (a) profit. Whether a man is "engaged in primary production on any land" within the meaning of s.75 does not depend simply on the activities carried on by him on that land. It depends rather on the purpose for which he engages in those activities, the end to which they are directed. What is his business on or with the land ? Is it that of a primary producer or of a dealer or speculator in land ? The need to determine the character of a taxpayer's undertaking in this way may be said to raise a difficult and sometimes an elusive question. Yet the distinction is one which this Court has constantly recognized. It is the distinction between, on the one hand, the man who holds property as an investment (in the case of land, in order to derive rents and profits from it by letting it or working it) and, on the other hand, the man who acquires and holds similar property for the purpose of selling it at a profit when a suitable opportunity to do so comes. It is the distinction between an investor and a dealer ; between a landowner or landlord and a land-jobber, as in the earlier cases he was called : see e.g. Perrott v. Deputy Federal Commissioner of Taxation (N.S.W.) (1925) 40 CLR 450 .
A man does not cease to be a landjobber because as part of his profit-making undertaking and with the object of realizing his land at the best price he improvesit. On the other hand, a man does not cease to be engaged in primary production because he has in mind that some day he may sell out. (at p493)
Judged by the test of real, substantial, primary or dominant purpose, the taxpayer in this case was never engaged in primary production within the meaning of s. 75 so as to be entitled to the deductions claimed. That, I think, is enough to dispose of this case ; and I would go no further if it were not that propositions which I cannot accept have found favour and I therefore feel bound to state my dissent and my own understanding of s. 75. (at p493)
Section 75 is one of a number of provisions in the Act whereby in determining the taxable income of taxpayers engaged in primary production expenditure of a capital nature or otherwise of a special character is deductible. The words in s. 75, "a taxpayer engaged in primary production", may be usefully looked at alongside certain expressions in other parts of the Act, with the reference in s. 54 to "a business of primary production" and to "land which is used for the purpose of agricultural or pastoral pursuits" ; and with the use of the same phrase in ss. 57AA and 57AB : with the reference in s. 76 to a taxpayer who is "carrying on agricultural or pastoral pursuits" : with the words "land used for primary production" in s. 88A. I may add to these a reference to s. 62AB (although it was enacted after the present case arose) which allows as a deduction the cost of new plant "for use by the taxpayer . . . for the purpose of carrying on . . . a business of primary production". The general purpose and policy of these provisions, it may be assumed, is not simply to relieve primary producers from taxation. It is to do so in order to encourage expenditures which increase the efficiency of primary industry. Section 75 (1) clearly reflects a policy of encouraging capital expenditure which will improve the productive capacity of rural land in Australia. A policy and purpose behind s. 75 may thus be seen. But the wording of the section, from which its application must be determined, is unfortunately loose and imprecise. The draftsman seems to have taken no trouble to make it harmonious with other provisions I have mentioned that reflect the same general policy and purpose. I set out s. 75 (1) items (a) to (f) inclusive. The later paragraphs or items, some of them added by amendments since 1960, do not assist in the matter now under discussion. Those I have taken, the first six, sufficiently indicate the kinds of expenditure the section deals with.
"75 (1) Expenditure incurred in the year of income by a taxpayer engaged in primary production on any land in Australia or in the Territory of Papua and New Guinea in -
- (a)
- the eradication or extermination of animal or vegetable pests from the land;
- (b)
- the destruction and removal of timber, scrub or undergrowth indigenous to the land;
- (c)
- the destruction of weed or plant growth detrimental to the land;
- (d)
- the preparation of the land for agriculture;
- (e)
- ploughing and grassing the land for grazing purposes;
- (f)
- the draining of swamp or low-lying lands where that operation improves the agricultural or grazing value of the land;
- . . . .
shall be an allowable deduction." (at p494)
It will be seen that three conditions, which are presently relevant, must be fulfilled if a deduction of expenditure is to be allowed under this section : first the taxpayer must be a person "engaged in primary production on any land in Australia or in the Territory of Papua and New Guinea" ; secondly the expenditure must be in an activity of one or more of the kinds described ; thirdly that activity must have been performed on "the land", which grammatically must mean the land on which it is predicated that the taxpayer is engaged in primary production. (at p494)
The first question that arises is, when is a man "engaged in primary production" ? As I have already said, I take this expression to refer to the business purpose of the taxpayer as the possessor of the land. Whether a person in engaged in primary production on land does not, I think, depend on whether any produce has actually been gathered from that land, or on how soon produce can be gathered from it. It depends, I think, on whether the activities in which the taxpayer is there engaged are for the purpose of obtaining produce from it. It is the character of the taxpayer's undertaking on the land which in my view brings s. 75 into operation, not the stage which his undertaking has reached. It is not suggested that the land must have been brought into actual production in the sense that crops had been harvested or were ready for harvesting, that wool had been shorn or sheep were ready for shearing or for market, or that cattle had been sent to market or were ready for the market. A man could surely be engaged in primary production if he had sown or planted his land, whether with wheat, grapes, bananas, fruit-trees or pine-trees - however distant the time of harvest might be. And the day before sowing or planting he would be no less engaged in primary production than the day after. And if the land had not previously been ploughed or planted he would in my view still be engaged in primary production there if he were ploughing it to plant a crop for the first time. So too, if he were ploughing it and sowing grass in order to graze stock there. He would not first become engaged in primary production on that land when the grass had grown and he had brought stock upon his improved pasture and they had begun to fatten. The various kinds of expenditure itemized and described in s. 75 shew that expenses preliminary to planting or stocking are contemplated deductions. They include clearing the land, by, for example, ring-barking, felling, suckering and burning-off or removal of logs.
That at all events is for me what is me ant by item (b) of s. 75 (1) - "destruction and removal of timber, scrub or undergrowth indigenous to the land". These words seem to comprehend clearing virgin forest or scrub from land so that it can be used for primary production by grazing or agriculture. It would be surprising if they were meant to refer only to expenditure in clearing timber, scrub and undergrowth from land already capable of carrying stock in useful numbers. Section 75, it is to be remembered, is not concerned with the ordinary annual outgoings and expenses of the conduct of a farming or grazing business, which would be taken into account in arriving at the taxable income of a taxpayer. It is concerned with expenditures of a capital character by which the taxpayer's capital asset, his land, is improved. (at p495)
I cannot accept the proposition that a taxpayer cannot be said to be "engaged in primary production on any land" if the land is not then in a state in which it can be used for primary production. This seems to me to postulate a demarcation which is quite imprecise, indeed illusory. Once it be conceded, as obviously it must be, that actual produce need not have been had from the land, I cannot see any criterion to be applied to the words of s. 75 except that the taxpayer's operations on or in relation to the land were undertaken by him with the purpose or aim of gaining produce from that land by his carrying on there the business of a primary producer. The difficulties of any other view become apparent as soon as one seeks, as in the course of argument counsel and the Court with the aid of hypothetical examples sought, to give a precise meaning to the words "on any land". These words do not relate to the word "expenditure". They relate to the words "engaged in primary production". That is to say, the operation of the section is confined to cases where the expenditure is on or in relation to "the land". And "the land" is "any land" on which the taxpayer was, when the expenditure was incurred, engaged in primary production. The words "land" and "any land" are notoriously indefinite and have given rise to problems under many statutes. They are often used to denote "an area of land owned and used as one area or as an integral whole", as Starke J. expressed it in Federal Commissioner of Taxation v. Royal Sydney Golf Club (1943) 67 CLR 599 , at p 615 . But the difficulty of identifying "land" as an area of land, a unity, an integral whole, or as a separate parcel remains : see the discussion in the second Golf Club Case, Royal Sydney Golf Club v. Federal Commissioner of Taxation (1955) 91 CLR 610 , at pp 625, 626 . Hypothetical cases are usually a poor aid to construction ; but I may take two or three illustrations from events constantly occurring in the country.
Let it be supposed that a taxpayer, a farmer, is possessed of Blackacre - part of it cleared, fenced, and in production ; another contiguous part heavily overgrown with timber and scrub and weeds poisonous to stock, useless for cultivation or grazing until cleared. Can he not have the benefit of s. 75 for expenditure in clearing the uncleared part of his land? Now suppose the uncleared paddock is not contiguous with but some distance away, and separated say by a road, from the cleared land, Blackacre, where the homestead stands ; that it is held under a different form of Crown land tenure ; but that it has been acquired by the taxpayer so that he may clear it and then use it in conjunction with Blackacre in his established business as a primary producer. Is he not to be entitled to the benefit of s. 75 for the cost of clearing it? And finally, suppose the taxpayer to be a farmer who sold out in one district to take up Forestacre, a block of new country in another district. He obtains this new holding for the purpose of clearing it and bringing it into production and there carrying on the business of a primary producer. Is he not entitled to the benefit of s. 75 for expenditure he incurred in doing so - or must he first bring part of it, and if so how much, into production before he can claim a deduction for the expenditure of clearing the rest? In my view in each of the cases I have supposed - and they are not fanciful or far-fetched illustrations - a deduction under s. 75 would be allowable. (at p496)
Finally, I should say, with respect, that I am unable to accept the construction of s. 75 which the Chief Justice has adopted, namely that whether a taxpayer is entitled to a deduction for expenditure in clearing virgin land is to be determined by seeing whether he is already carrying on business as a primary producer on developed land elsewhere. I recognize the value of this consideration as evidencing the purpose for which the new land was taken up. But to my mind it is only for that that it would be relevant. I do not think that whether or not a man who acquires Scrubacre, virgin land, in one part of Australia is there engaged in primary production can depend in law upon whether or not he is engaged in primary production elsewhere in Australia or New Guinea. To say that seems to me, with respect, to involve reading the words "engaged in primary production on any land" in a sense which, having regard to the context, they cannot bear. (at p497)
I need say no more in explanation of my agreeing that the appeals should be dismissed ; but not accepting all the reasons which have been put forward in other judgments for that conclusion. (at p497)