McInnes v. Federal Commissioner of Taxation.

Judges:
Waddell J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 28 April 1977.

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Waddell J.: This is an appeal against the decision of the Deputy Commissioner of Taxation to disallow an objection against an assessment to income tax based upon income derived during the year ended 30th June 1972. In his return for that year the taxpayer disclosed a net income from livestock of $153. He objected to the assessment which issued upon the ground that he was a primary producer, that he was entitled to the averaging provisions of the Income Tax Assessment Act, 1936 and that his income over five years should be averaged before tax was calculated. This objection was disallowed.

At all relevant times the taxpayer has earned his principal income from his practice as a barrister. He was born in the country and lived there until he obtained employment in Sydney in 1950. His father was a grazier and until 1948 was part-owner of a property near Lake Cargelligo. The property was sold in that year and his parents moved to Condobolin where, until 1969 when his father retired, he carried on the occupation of grazier and dealer in sheep, running his stock on properties which he leased or on agistment. The taxpayer first acquired an interest in sheep in about 1956. Until about 1966 his interests included several joint ventures and until 1962 he had a partnership with his mother and a brother. The sheep in question were grazed on land obtained for him either by his father or by one of his three brothers. His father and brothers looked after the sheep for him. In 1966 he sold his sheep as it then appeared that the grazing of sheep would not be as profitable as previously it had been. When his father had gone to Condobolin he had bought a house which gave him the right to graze a limited number of stock on the Municipal Common. His father did not exercise this right and in the latter half of 1966 or in the beginning of 1967 the taxpayer purchased two cows and agisted them on the Common in his father's name. Until 1974 he continued to graze cattle on the Common. The poundkeeper exercised control over stock agisted there and he would report to the taxpayer's father or to one of his brothers anything unusual which happened. The Council allowed a maximum of three cows and calves to be agisted in the name of one person. However, in good seasons, no objection was made if the numbers exceeded this limit. When the taxpayer's father came to live in Sydney in 1969 he still retained his house in Condobolin and accounts for agistment for the cattle of the taxpayer were then sent to his brother in Condobolin. In about 1974 the Council announced that the Municipal Common was to revert to the Crown and asked Commoners to remove their stock. The taxpayer sold his stock and has not since carried on any primary production.

The Deputy Commissioner of Taxation issued assessments against the taxpayer on the basis that he was a primary producer from 1956 until his 1968 return. In that year he refused such an assessment. An appeal by the taxpayer to the Board of Review was dismissed. Following the dismissal of his appeal and until his return for the 1972 year the taxpayer objected to paying tax on earnings from cattle on the basis that if his operations were not a business then the natural increases were capital in nature and he was not assessed upon these earnings.

The taxpayer has tendered in evidence a schedule in respect of the tax years 1967-1974 inclusive showing stock-on-hand at the beginning and end of the year, natural increase, death, sales and gross profit. There is no evidence as to the net profit derived in each year except in respect of 1972 for which the taxpayer's income tax return shows an amount of $84 for agistment. The gross profit shown for each of the years is as follows: 1968, $176; 1969, $256; 1970, $163; 1971, $232; 1972, $153; 1973, $284; 1974, $219. During these years the average number of stock-on-hand at the end of each year was between four and five. The average number sold each year was between two and three. The average natural increase was between two and three. The figures shown for 1972 are as follows:

      Stock-on-hand
        1/6/71/ -                        4    $268
      Natural increase -                 2
      Sales -                                             1    $ 86
      Stock-on-hand
        30/6/72 -                                         5     335
      Gross profit                             153

                                         6    $421        6    $421
          

For this year, after deducting the outgoing of $84 for agistment, it would seem that the net profit was $69.

The case for the taxpayer is that the activities described above entitle him to be

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ATC 4169

regarded for the 1972 tax year as a ``primary producer'' within the meaning of sec. 157(1) of the Income Tax Assessment Act. By subsec. (2) of this section ``primary producer'' is defined as meaning ``a person who carries on in Australia a business of primary production''. So far as is relevant ``primary production'' is defined by sec. 6(1) of the Act as meaning ``production resulting directly from... the maintenance of animals... for the purpose of selling them or their bodily produce, including natural increase...''. It may be conceded that the taxpayer did in the 1972 tax year engage in primary production as defined. The question raised by the appeal is whether it can be said that during that year he carried on a business of primary production. This is essentially a question of fact.

It is to be inferred from the evidence that the taxpayer's stock activities were not carried on as a hobby but for the purpose of making some additional income. It is clear enough that activities may be said to be a business even though carried on only in a small way but nonetheless before such activities can be said to be a business it must be possible to attribute some significant commercial purpose or character to the activities. An example of both these statements is to be found in the decision of Walsh J. in
Thomas v. F.C. of T. 72 ATC 4094 at 4099-4100. It is also, I think, relevant to compare the operations involved in the taxpayer's activities with those ordinarily involved in activities which would readily be conceded, as a matter of ordinary use of language, to amount to carrying on a business of grazing cattle: cf. the decision of Williams J. in
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186 at 188-190.

In my opinion no significant commercial purpose or character can be attributed to the activities here in question in view of the small number of stock and sales involved and the small profit derived. The activities involved have little in common with those associated with what would ordinarily be described as a business of grazing. In my opinion the evidence does not establish that during the 1972 tax year the taxpayer carried on a business of grazing and hence of primary production.

For the foregoing reasons the appeal is dismissed.