Case H30

Judges: FE Dubout Ch

N Dempsey M
P Gerber M

Court:
No. 3 Board of Review

Judgment date: 21 July 1976.

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N. Dempsey (Member): This taxpayer, a private company in which there are only two shareholders, a husband and a wife each holding one share, was incorporated on the 7th November, 1967. It was formed to acquire a property, the purchase of which had already been negotiated by the husband.

2. The property comprised about 100 acres and it was situated about four miles from a prominent seaside resort and had been previously used as a riding school catering for seaside visitors. Included in the purchase were five head of horses which had been used by the riding school.

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3. In due course, an income tax return for the year ended 30th June, 1968, was lodged and this return indicated that the nature of the business being carried on by the company was that of a pastoralist. The return contained what was described as a ``Horse Trading Account'' which merely indicated the purchase of 5 head for $580 and that 5 head valued at $580 were on hand at the 30th June, 1968.

4. Deductions totalling $6,190 were claimed and they included interest, costs of borrowing, land clearing and improvement, feed, depreciation etc. The depreciation was claimed under sec. 57AA and was in relation to a power mower. As the return disclosed a loss of $6,190 naturally no assessment issued.

5. At the appropriate time a return for the year ended 30th June, 1969 was lodged. A ``Horse Trading Account'' showing that 5 head were on hand at the beginning of the year and again at the end of the year was incorporated and the opening and closing values were the same. A ``Cattle Trading Account'' was also included indicating that 7 head of cattle were purchased during the year for $402.50 and that they were sold during the year for $315.09, a loss of $84.41 resulting, which, in addition to expenses and depreciation totalling $8,206.27 made up a total loss for the year of $8,290. Again as the return disclosed a loss, no assessment was raised.

6. The deductions claimed again included interest, land clearing and improvement, repairs and maintenance, feed etc.

7. Finally, a return for the year ended 30th June, 1970, was lodged and this return showed that during that year, rental had been received from two properties comprising flats, the total being $8,163. Expenses were claimed against these rents totalling $5,142 and a net income from ``Rent Received'' was shown at $3,021 which was then transferred to a ``General Profit & Loss Account''.

8. The ``Horse Trading Account'' indicated that the 5 horses, valued at $580 at the beginning of the year, had been sold for $475, a loss of $105.00 and this was transferred to the ``General Profit & Loss Account''. Various expenses were again claimed, on this occasion in the ``General Profit & Loss Account'', and together with depreciation $10 on a typewriter, they totalled $6,364, and a net loss of $3,448 for the year, after including the loss on sale of the horses amounting to $105, resulted.

9. The expenses claimed again included interest, repairs and maintenance, land clearing and improvement, costs of borrowing, etc.

10. After considering the returns, the Commissioner raised and issued on the 15th February, 1972, an assessment based on a taxable income of $2,012 and enclosed with the notice, an adjustment sheet showing how he had arrived at this taxable income. The loss of $3,448 referred to supra he transformed to a profit of $3,021 by disallowing the expenses and depreciation $6,364 and the loss on the sale of the horses $105.

11. The profit of $3,021 thus arrived at, he then reduced by ``Rates and Taxes'' $387, included in the $6,364 and by Rates $170, claimed in the year for the year ended 30th June, 1968 and ``Rates and Taxes'' $452 claimed in the return for the year ended 30th June, 1969. It will be noted that apart from the Rates and Taxes totalling $622, no deduction was allowed for the balance of the losses set out in the returns for the years ended 30th June, 1968 and 1969.

12. On the 27th March, 1972, the Public Officer of the company and on behalf of the company stated:

``I,... hereby object to the disallowment of expenses claimed in respect of the years 1968, 1969 and 1970 and notified by assessment dated 15th February, 1972.

The expenses disallowed are in my opinion properly allowable under either sec. 51 or sec. 75 of the Income Tax Assessment Act and were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.''

13. It will be noted that reliance is placed on sec. 51 and sec. 75 of the Act.

14. The husband shareholder, who actually conducted all matters relating to the property and the work carried out thereon, gave evidence. Basically, the claim advanced is that in the relevant years a business of primary production was being carried on and that all the expenses set out in the return are allowable deductions.

15. It is clear from the evidence that from the date of purchase of the property to the 30th June, 1968, apart from the five riding horses acquired with the property, no other live stock was depastured on the property. Monies were, however, expended on clearing and fertilising the land.

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16. Turning then to the second year, the year ended 30th June, 1969, one finds that in this year, 7 head of steers were purchased in August, 1968 and they were sold in December, 1968, at a loss of $87. The evidence in relation to this transaction is that the animals were purchased as an experiment to see if they would fatten on the property.

17. It was believed, at purchase of the property, that if clearing and fertilising were carried out, the property could support 70 head and after the first expenditures, these 7 head were acquired to test the result. They did not gain condition but, in fact, lost in weight so they were disposed of. Further inquiries then indicated that special grasses would have to be introduced before the property would fatten cattle, but the cost was prohibitive.

18. Although further monies were expended in clearing etc. in the year ended the 30th June, 1970, no cattle were grazed in that year and the property was sold in April, 1970. The horses, which it was admitted, were merely relics of the riding school, were sold separately after the sale of the property.

19. It is in the light of these circumstances that the Board is called on to decide whether it can be held that in each of the years ended 30th June, 1968, 1969 and 1970 the company can be held to have been carrying on business and if so, whether such business is the business of primary production.

20. The Board has been referred to a number of authorities and decisions to support the contention of the Commissioner that the taxpayer cannot be regarded as having been engaged in a business of primary production during the relevant years.

21. Attention was drawn to remarks made by me in my decision in Case N23,
13 T.B.R.D. 88 and which appear at p. 94 and which I quote:

``However, it is my opinion that whatever the intention of the taxpayer may have been, it has no bearing on the question as to whether or not he was carrying on business as a `primary producer'. In this connexion, I refer to the remarks of Lord Buckmaster in
J.R. O'Kane & Co. v. I.R. Commrs. ( (1922) 12 T.C. 343 at p. 347 ), where he said: `It may well be accepted that they did so intend; yet the intention of a man cannot be considered as determining what it is that his acts amount to; and the real thing that has to be decided here is what were the acts that were done in connection with this business, etc.'''

22. It seems that the decision in the case of
Southern Estates Pty. Ltd. v. F.C. of T. (1966) 117 C.L.R. 481 , which is relied on by the Commissioner to support his decision is very much to the point. This case concerned a claim that the company which had been a member of a partnership was entitled as a partner to a share of the loss of such partnership to be arrived at by allowing certain expenditure as deductions to the partnership in terms of sec. 75(1).

23. The case came before McTiernan J. in the first instance, and in deciding against the taxpayer in the course of his decision at p. 484 referred to the contention that ``the evidence supports a strong probability that the purpose of the partnership was the `maintenance of animals' - sheep - on the land when the pasture had grown adequately;'' He then said ``I am of opinion that upon the widest construction of which the word `engaged' admits, a person who merely has an intention to carry on the business of primary production is not engaged in it''.

24. An appeal against the decision of McTiernan J. was dealt with by the Full High Court and it was dismissed. Barwick C.J. at p. 488 said, referring to sec. 75:

``It cannot be construed in my opinion, to include as a person engaged in primary production, a person who no more than intends to so engage whilst he is doing no more than make preparations to enable him to do so.''

25. Taylor and Owen JJ. at p. 491 in their joint decision agreed with McTiernan J. and said:

``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 is 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.''

26. Windeyer J., although he agreed that the appeal should be dismissed, was not prepared to be as restrictive in his interpretation of sec. 75(1). However, in this

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case, I feel bound to follow the reasons of the majority and to hold that in the relevant years, this taxpayer cannot be held to have been engaged in a business of primary production. I would go further and say that it was merely engaged in steps preparatory to engaging in business and this would apply to the years ended 30th June, 1968 and 1969.

27. The deductions claimed in these years for land clearing and improvement are therefore not allowable in terms of sec. 75(1), nor is depreciation claimed allowable either in terms of sec. 54 or sec. 57AA. Interest claimed on the loan used to acquire the property would not be allowable in terms of sec. 51(1) being of a capital nature and other expenses claimed normally allowable under sec. 51(1) would also not be allowable as they were not incurred in earning assessable income or in carrying on a business for that purpose. Costs of borrowing which are allowable in terms of sec. 67, in the circumstances of this case would not qualify as the funds were not used to produce assessable income.

28. In the year ended 30th June, 1969, similar considerations would apply to similar expenditures if incurred. They would also apply to a claim for repairs and maintenance in that year.

29. Finally, I turn to the year ended 30th June, 1970, and in relation to items applicable to the property purported to be used for primary production these would not be allowed in terms of my decision covering the prior years. However, at the hearing, it was shown that certain expenses which had been claimed did not refer to the property I have been dealing with, but more specifically to the activities in relation to the two properties which were rent producing. The fact that certain expenses were so applicable was never drawn to the attention of the Commissioner and as previously pointed out herein, the objection merely referred to sec. 51 or 75. The expenses now shown to be applicable to the rentals are as follows:

      Item 1:       Interest ............... $1,134.00

      Item 2:       Costs of Borrowing ..... $  474.75

      Item 3:       Audit Fees ..............$  267.60

      Item 4:       Printing Stationery .....$   61.02

      Item 5:       Bank Charges ............$   31.48

      Item 6:       Depreciation ........... $   10.00.
          

30. It is well established that neither a Board or the Court has any power to enlarge the grounds of objection and I do not consider it necessary to refer to the many authorities for this statement. It has also been said that ``The grounds of objection need not be stated in legal form, they can be expressed in ordinary language, but they should be sufficiently explicit to direct the attention of the Commissioner to the particular respects in which the taxpayer contends the assessment is erroneous and his reasons for this contention'' per Williams J. in H.R.
Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 9 A.T.D. 267 at p. 273 .

31. Items 1, 3, 4 and 5 supra are items which would be covered by sec. 51. However, item 2 ``Costs of Borrowing $474.75'' is covered by sec. 67 of the Act, whilst item 6, ``Depreciation'' is covered by sec. 54. These items would be allowable if proper objection had been taken, but I feel constrained to hold that they are not covered by the grounds of objection, nor could the Commissioner be reasonably expected to apply his mind to these items.

32. Items 1, 3, 4 and 5 which total $1,494, are allowable under sec. 51 and I therefore hold that the assessment for the year ended 30th June, 1970 should be amended and reduced by this amount.