FEDERAL COURT OF AUSTRALIA
Puzey v Federal Commissioner of Taxation
[2004] FCAFC 23
French, Hill and Carr JJ
13 February 2004 - Perth
French, Hill and Carr JJ. The present appeal was brought against a judgment of Lee J dismissing an appeal by Mr Noel Puzey against the disallowance of objections to assessments of his income tax for the years ended 30 June 1997 and 30 June 1998 - Puzey v FCT (2002) 50 ATR 595; 2002 ATC 4853. The case concerned deductions claimed by Mr Puzey in respect of his investment in a project for the planting and development of an Indian Sandalwood plantation.
2 Relevantly for present purposes Lee J made the following orders at first instance on 24 December 2002:
- 1. Save for item 2 hereof, the appeal be dismissed.
- 2. The "appealable objection decision" in respect of the 1998 year of income be set aside and the matter be remitted to the Commissioner with the direction that the applicant's objection to the amended assessment of income tax be allowed to the extent that deductions from taxable income are allowed for plantation establishment fees ($2000), and for plantation management fees ($800).
- 3. The applicant pay one-half of the Commissioner's costs of the appeal.
3 On 26 August 2003, in appeal W30 of 2003, the full court, on appeal from Lee J, made the following orders:
(Puzey v FCT (2003) 53 ATR 614; 2003 ATC 4782 at 4801.) In the related appeal, W31 of 2003, the court ordered that the appeal be dismissed with costs and allowed a cross-appeal in relation to costs of the proceedings at first instance.
- 1. Paragraph 2 of the orders made on 24 December 2002 be varied by deleting the words "… the deductions from taxable income are allowed for plantation establishment fees ($2000), and for plantation management fees ($800)" and inserting in lieu thereof the words "the deduction from taxable income is allowed for plantation management fees ($800)".
- 2. Paragraph 3 of the orders made on 24 December 2002 be set aside and in lieu thereof there be an order that the appellant pay the respondent's costs of the proceedings at first instance.
- 3. The appeal be otherwise dismissed.
- 4. Paragraph 1 of the above orders be suspended for 10 days. If either party wishes to make submissions concerning the plantation management fees or the plantation establishment fees they may file and serve written submissions within 7 days of the publication of these reasons. If any such submissions are received, the suspension of para 1 will continue until further order.
4 In the joint reasons for judgment of Hill and Carr JJ (with which French J agreed) the court upheld the following conclusions of the primary judge:
- 1. That in the year of income ending 30 June 1997, Mr Puzey's involvement in the project constituted the carrying on of a business: (ATR 626 [54]; ATC 4793).
- 2. By reason of the foregoing conclusion, amounts paid in the 1997 income year for seedlings to be used in the project were allowable deductions in that year and not on capital account (ATR 624 [45]; ATC 4791).
- 3. By reason of a restructure of the project arrangements, Mr Puzey was not carrying on a business in the year of income ended 30 June 1998 and became a passive investor in a managed investment scheme (ATR 627 [57]; ATC 4794).
- 4. Amounts outlaid by Mr Puzey for seedlings in the year of income ended 30 June 1998 were not deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997).
- 5. The balance of the outgoings in both years of income would have been deductible under s 8-1 (ATR 628 [62]; ATC 4794).
- 6. By reason of the application of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) and determinations made by the Commissioner thereunder tax benefits gained by Mr Puzey were properly cancelled. These comprised outgoings for rental and management fees together with the outgoings for seedlings in the 1997 year of income (ATR 628-629 [66]; ATC 4795).
5 An outstanding question relating to the deductibility of plantation establishment fees of $2000 and plantation management fees of $800 in the year of income 1998, arises out of his Honour's judgment. Mr Puzey had claimed before his Honour that his amended assessment for the 1998 year of income was excessive in that he had not been allowed the following deductions:
- (i) $40,000 for purchase of seedlings;
- (ii) $2000 for plantation establishment fees;
- (iii) $800 for plantation management fees; and
- (iv) $1200 for lease fees
Upon execution of the management agreement the applicant incurred a liability in respect of that year of income to pay to Lincfel a plantation preparation and establishment fee of $2000 and an annual management fee of $800. As with the payments made to purchase seedlings, those amounts may be characterised as payments on revenue account being payments made to further the purpose of gaining or producing assessable income and the sums claimed were deductible under s 51(1) of the ITAA 1936 and s 8-1 of the ITAA 1997.
6 On appeal Mr Puzey was successful in arguing the deductibility of the amounts he claimed in the 1997 year of income before the effect of the determination under Pt IVA of the ITAA 1936 was considered. He was unsuccessful in relation to the deductibility of the amounts claimed in 1998 for the purchase of seedlings. That is because those amounts were held to be capital outgoings. No separate argument was addressed to the full court concerning the two amounts of $2000 and $800 in the 1998 year. In their joint reasons, Hill and Carr JJ expressed the view that there seemed to be no reason why the latter, at least, would not be deductible but for the determination. The court was of the view that the former would be capital. In the final paragraph of their reasons, Hill and Carr JJ said (at 53 ATR 614 at 635 [100]; 2003 ATC 4782 at 4801):
In the event no further order was made after the expiry of the 7 days although written submissions were lodged within the time limited by para 4 of the orders.In case either party should wish to make submissions concerning the plantation management fees and the plantation establishment fees, they should do so in writing within seven days of the publication of these reasons. To enable this to be done the orders made by the court should be suspended for 10 days or such further time as the court may order to enable any further submissions as the parties may wish to file to be considered.
The appellant's contentions
7 It was submitted on behalf of Mr Puzey that the Commissioner had not raised or argued in his cross-appeal that the primary judge had erred in finding the plantation establishment fee or the plantation management fee to be a deductible outgoing under s 8-1 of the ITAA 1997. It was said that on this basis no order should be made overturning the primary judge's findings. Both the plantation establishment fee of $2000 and the plantation management fee of $800 were incurred pursuant to Pt 3 of the schedule to the management agreement entered into between Mr Puzey and Lincfel. Even after the restructuring arrangements in 1998, the management agreement continued in operation and continued to be enforceable by Mr Puzey. It was pointed out that this had been confirmed at ATR 626 [55]; ATC 4793 of the joint judgment of Hill and Carr JJ where their Honours referred to the question whether the restructuring of the project arrangements at the request of the ASC had the consequence that Mr Puzey ceased to carry on the business which he had commenced in June 1997 as his Honour held. Their Honours said:
At ATR 627; [58] ATC 4796 of the joint judgment they said:It is important to note that the contracts of lease and management entered into by Mr Puzey continued in operation and continued to be enforceable by him.
And at ATR 628 [62]; ATC 4794 in the joint judgment it was said that although the purchase price of the seedlings in the 1998 year of income was not deductible, the balance of the outgoings in both years of income would be.The question which then arises is whether the change affects the deductibility of the amounts outlaid by Mr Puzey. There can be no doubt that a contractual payment to a manager to manage such a scheme would be deductible. So too would rent paid by Mr Puzey. Outgoings such as rent and fees for services, if for the purpose of gaining and producing assessable income are deductible and not on capital account. The only question of any difficulty is whether a different result follows in respect of the purchase of seedlings.
8 It was submitted for the appellant that having regard to those findings, a finding could not properly be made that either the plantation establishment fee or the plantation management fee were not deductible under s 8-1 of the ITAA 1997 in the 1998 year of income. It was therefore submitted that the orders of this court should be amended accordingly and order 2 made by Lee J on 24 December 2002 not be disturbed.
9 It was submitted on behalf of the Commissioner that the orders in the form proposed by the court are in accordance with the reasoning in the joint judgment in that the plantation management fees were outgoings bearing a revenue character and properly deductible. The plantation establishment fees, it was said, bore a capital character. Reference to the management agreement showed those fees to be a one-off payment for land preparation and planting. Accordingly, they constituted expenditure directed to securing an advantage of a lasting character.
10 In our opinion, the orders which were made on 26 August 2003 should be confirmed. In any event the suspension of order 1 ceased to operate at the expiry of 10 days after it was made. The management agreement referred, in Pt 3, to a "preparation and establishment fee in the sum of $2000 which shall be paid by the Grower to the Plantation Manager on the 1st September 1997 or alternatively in four (4) quarterly instalments in advance commencing on the 1st September 1997". That fee relating to the costs incurred under the Plantation Establishment Programme in Pt 4 (recital D), which set out the process of plantation establishment:
(i) Plantation Establishment Programme
Planting to commence on 1st June 1998 or as soon thereafter as ground conditions permit.
Plantable area in two plantings - Two acres in total.
Species - Indian Sandalwood 400 plus pot hosts - East African Ebony 160 - Rosewood 160 - Mahogany 160 - Acacia 640 Stocking rate/spacing Fertiliser NPK Weed and Grass Control Rate of application as recommended by strip spray CALM Other preparation In accordance with good horticultural practice as recommended by CALM.
11 The plantation establishment fees are properly characterised as on capital account. Although the management agreement is a contract concerned with the payment for plantation managerial services, it draws an explicit distinction between payments of amounts for plantation establishment costs and payments for plantation management fees in Pt 3 of the agreement. The costs breakdown suggests ongoing management of the plantation as a revenue item captured by the later fee under the contract. The management fee is an ongoing fee payable annually in 4 quarterly instalments and CPI indexed. The plantation preparation and establishment fee is a lump sum, one-off fee of $2000 payable on 1 September 1997. Its character does not alter by virtue of the option to pay it in four quarterly instalments in advance. In our opinion the characterisation essayed in the joint judgment of Hill and Carr JJ (at [99]) was correct and the suspension under order 4 should be lifted enabling order 1 to have effect. No issue of costs adjustment arises.
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