Ferguson v. Federal Commissioner of Taxation.

Sheppard J

Supreme Court of New South Wales

Judgment date: Judgment handed down 13 February 1978.

Sheppard J.: This is an appeal by the taxpayer from a decision of a board of review given on 2nd June, 1977. The board by majority dismissed the taxpayer's appeal against the disallowance by the Commissioner of certain expenditure incurred by the taxpayer pursuant to the provisions of two agreements to which I shall in a moment refer.

The taxpayer is a serving member of the Royal Australian Navy. At the time that the agreements were entered into he held the rank of lieutenant-commander and was doubtful whether he would be promoted to the rank of commander. He was therefore thinking of retirement in two or three years. However, some six months or so after the agreements had been entered into, the taxpayer was promoted to the rank of commander. It then became his intention not to retire for a period of four or five years from the date of his promotion.

Well before the agreements were entered into he had decided that when he retired he would probably go on to the land and raise beef cattle. Before June, 1973, he had discussions with representatives of a company. Cattle Leasing Limited, which had evolved a scheme pursuant to which Charolais half cross cows could be sub-leased from the company and managed on a property owned and operated by an associate company, Gunn Rural Management Pty. Limited.

On 21st June, 1973, the taxpayer entered into two agreements, one with Cattle Leasing Limited, for the sub-lease of five identified Charolais half cross cows, and the other with Gunn Rural Management Pty. Limited providing for the management of the cattle. Under the first agreement the cattle were sub-leased for a period of four years in consideration of the payment of a monthly rent of $33 for each cow. The lease made elaborate provisions in relation to the progeny of the cows during the period of the lease. The progeny was to belong to the taxpayer but there were provisions dealing with what was to happen depending upon whether the progeny was male or female. Broadly speaking, female progeny was to be kept and in due course

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further progeny bred from it. Male progeny was to be sold although there were some circumstances in which it would be kept for a time. The idea was that over a period the female progeny would be joined with pure bred Charolais bulls with the result that further progeny would become of a purer strain until the situation was reached where there were a number of cattle all of which would be regarded by the Charolais Society as being pure bred Charolais cattle. The principal purpose of the taxpayer in entering into the agreement was to provide cheaply a number of stock which he could use at least as a starting point for the property which he intended to buy. The management agreement provided for the payment by the taxpayer of a number of outgoings, the detail of which I need not set out.

It is agreed by the Commissioner that each of the outgoings claimed in respect of the two years of income in question, the years ending 30th June 1973 and 1974, is of a revenue nature. It is also agreed that the amounts claimed by the taxpayer for the 1973 tax year total ling $2,370 and the amounts claimed by him for the 1974 tax year total ling $1,258 are the appropriate amounts to be allowed by way of deduction if he is otherwise correct in the submissions which have been made on his behalf.

Before the board of review the taxpayer gave evidence. There were tendered a number of documents in support of his case. The detailed facts of the matter are exhaustively set out in the reasons of the members of the board, particularly in the reasons for decision of Mr. O'Neill who found for the taxpayer.

No fresh evidence was called before me; the Commissioner conceded that the taxpayer's evidence was given honestly and accurately and should be accepted at its face value. The members of the board appear to have taken that view also.

The issue between the parties is whether the outgoings are allowable as deductions under either limb of sec. 51(1) of the Income Tax Assessment Act 1936 as amended.

The principal argument advanced by the taxpayer was that he was carrying on a business (said by his counsel to be the business of cattle production) and that the outgoings were therefore deductible as outgoings incurred in carrying on that business under the second limb of the section. The evidence reveals that during the tax year ended 30th June, 1974, five calves were born so that by the end of that year the taxpayer had an interest, whether as sub-lessee or owner, in ten cattle. In the years that have followed further calves have been born. Some have been bulls which have been sold.

The question of whether or not a business is being carried on is a question of fact. The whole of the circumstances must be looked at and, so it seems to me upon a reading of a number of cases, no individual circumstance is necessarily conclusive. This is not the occasion for an analysis of the cases nor for a lengthy consideration of what is involved in the enterprise to which I have referred. Having considered the whole of the circumstances which have been relied upon, I have reached the conclusion that the taxpayer has not shown that he was, during the relevant tax years, carrying on a business of cattle production or any business whatsoever stemming from the fact that he had entered into the two agreements to which I have referred. In reaching that conclusion I have taken very much into account the fact that the taxpayer unquestionably has the intention of going on to the land and that it is likely that he will eventually use such progeny as have not been sold as stock upon the land he will acquire. I agree with his counsel that that circumstance serves to distinguish this case from others where it has been held that comparatively small static enterprises are not businesses. There was not in those cases evidence to suggest that any of the enterprises were being conducted in a small way but as a starting point for something which would develop into substantially greater proportions.

But I think there is force in submissions which were put to me on behalf of the Commissioner that there were really two steps in the taxpayer's proposals. The first was the entry into the agreements to which I have referred and the gaining of stock pursuant to them; the second will eventually be the acquisition of a property and the commencement of a cattle-raising business thereon. There are indications in the taxpayer's evidence that this is how he regarded the matter. It is true that one has to look at the matter objectively, and, as his counsel submitted, one does not, merely because of the use of certain words by the

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taxpayer, disregard objective facts. But I think the reality of what was being done was that some stock were being acquired at what was believed to be a fairly cheap price against the day when the property would eventually be acquired and the business commenced. Accordingly, the deductions claimed cannot be allowed under the second limb of sec. 51(1) of the Act.

I have found more difficult the question of whether or not the taxpayer is entitled to rely upon the first limb. It seems to me that it may be available to him because he would have anticipated by reason of the terms of the agreements that receipts would become available to him in the future by reason of the expected sale of male progeny. That indeed did occur although not in either of the years of income in question. But the fact that it did not occur in those years does not mean that the first limb cannot apply:
F.C. of T. v. Finn (1961) 106 C.L.R. 60. But there is a serious question as to whether the proceeds already received or to be received in the future on account of the sale of bulls are to be regarded as an income receipt. One member of the board answered the question favourably to the Commissioner upon the basis that, there being no business, the cattle could not be trading stock and accordingly the proceeds of sale from them could never be assessable income.

I think, however, that there is a further question as to whether or not the proceeds of sale ought not to be regarded as income upon the basis of the ordinary concept of that expression. If they were it would seem to me that they would constitute assessable income within the meaning of sec. 51(1) of the Act. Counsel for the Commissioner submitted that the venture was not one designed to produce assessable income. It was one designed to produce at the end of a period a given number of full or part bred Charolais cattle. It was true that during the period it could be expected that some cattle would be sold but the proceeds of sale from them would be quite insufficient to meet the costs involved in paying rental and other outgoings let alone to generate any surplus. That submission was accepted by the other member of the board who formed the majority. I do not find it necessary to deal with it because I have reached the conclusion that, even if the receipts are properly characterised as income, the expenses here claimed were not incurred in relation to the earning of that income. The expenses were incurred for the most part at any rate (and there is no basis upon which I can separate them) for the purpose of the principal object of the exercise, namely the establishment of a herd, however small, with which the taxpayer could begin stocking his property. The first limb of the section is therefore not available to the taxpayer.

During the argument something was said as to whether the venture might not be a profit-making scheme for the purposes of sec. 26(a) of the Act. I do not think it necessary to express any view on that matter and I do not.

For the above reasons this appeal is dismissed. I order the taxpayer to pay the Commissioner's costs of the appeal

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