Case K9

Judges: HP Stevens Ch
RE O'Neill M

CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 29 March 1978.

---

C.F. Fairleigh Q.C. (Member): The taxpayer (a full-time employee of a public authority) and his wife lodged a partnership business return for the year ended 30 June 1973 setting out a loss of $348 from ``orchard activities'' arrived at as follows: -

• $106 sum of gross sales of orchard produce and value of orchard produce taken for use by them;
• $454 sum of expenditure incurred and of depreciation of plant used in carrying on those activities and referable to sec. 51, 53, 54 and 75 of the Income Tax Assessment Act 1936 as amended.

The taxpayer included in his return of income for the year ended 30 June 1973 one-half of the said loss (after allowance of $14 net income of the partnership from interest).

2. The Commissioner adjusted the partnership income by disallowing the said loss of $348 as the Commissioner considered that in carrying on the orchard activities the partners were not carrying on a business; and thereupon the Commissioner adjusted the taxpayer's return of income for that year by increasing the taxable income by $174 (and by a further $2 in respect of a matter which is not presently relevant). The taxpayer objected thereto and the Commissioner decided to disallow the objection. That decision was referred to a Board for review.

3. The taxpayer and his wife lodged a partnership business return for the year ended 30 June 1974 setting out a loss of $452 from ``orchard activities'' arrived at as follows: -

$229 sum of gross sales of orchard produce and value of orchard produce taken for use by them;

$681 sum of expenditure incurred and of depreciation of plant used in carrying on those activities and referable to sec. 51, 53, 54 and 75 of the Income Tax Assessment Act 1936 as amended.

4. The Commissioner adjusted the partnership income by disallowing the said loss as in the previous year and adjusted the taxpayer's return of income accordingly by an increase of $226. The taxpayer objected thereto and the Commissioner decided to disallow the objection. That decision was referred to a Board for review.

---

ATC 101

5. There is a close connexion between both years and the matter cannot be fully understood without going outside each year in issue. Therefore as the references have been heard together the entire evidence may be taken to be directed to both years (
Trautwein v. F.C. of T. (1936) 56 C.L.R. 196 at p. 198 ;
N.A. Kratzmann Pty. Ltd. in Liqn. v. Tucker (1965-1966) 123 C.L.R. 257 at p. 264 ). Yet the parties are entitled to a separate decision on each reference as if heard separately (
Texas Co. (Australasia) Pty. Ltd. v. F.C. of T. (1939-1940) 63 C.L.R. 382 at p. 435 ) so that neither party is prejudiced if an appeal ensues (
Kratzmann v. F.C. of T. 70 ATC 4043 ; (1970) 44 A.L.J.R. 293 ).

6. The letter of objection in respect of the first year in issue is as follows (with minor emendations made thereto): -

• (i) The orchard business was acknowledged by the Taxation Department for 22 years as a source for earning my income and there is no need to change the practice.
• (ii) Although I run this business at a loss, nevertheless it is a source of my income, because I get from it nearly all fruits I need - oranges, apples, pears, plums and grapes.
• (iii) Besides I am growing vegetables every year, I consume my own potatoes 4 months. I grow tomatoes, cucumbers, onions, beans, lettuce, peas and carrots for my own use and for my relatives living in Sydney. So I am a Primary Producer.
• (iv) My orchard and garden business is not only my hobby because I spend on it all my spare time

      every day 3 hours x 190    =    570 hours

      every weekend 16 hours x

      50                         =    800 hours

      60 days of holiday x 8

      hours                      =    480 hours

                                     -----------

                                    1,850 hours
          

If somebody grows something in his backyard it is a hobby, but not farming on 7 acres.

• (v) I cannot exist without this business because I am not able to pay high rates and all expenses concerning my property from my scanty salary.
• (vi) Just from last year I am able to increase my activities on my property because there is water laid on. This means that my income from my business will increase.

7. The first ground of objection, viz., the ``orchard business was acknowledged by the Department for 22 years as a source for earning income'' fails in limine because as Murphy J. said in
D.C. of T. v. Vermont Chemical & Seed Pty. Ltd. 76 ATC 4269 at p. 4273 in applying
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 117 : -

• ... the Commissioner cannot by his conduct alter the effect of the Act of Parliament, for no estoppel can be created against the operation of the Act.... It is also clear that the Commissioner's duty is to obey the law, just as it is the taxpayer's duty to do so. See
  Maritime Electric Co. v. General Dairies Ltd. (1937) A.C. 610 at pp. 620-621 .

Wade was applied also in
Commercial Union Assurance Co. of Australia Ltd. v. F.C. of T. 77 ATC 4186 at p. 4199 . See further
Cudgen Rutile (No. 2) Ltd. v. (Sir Gordon) Chalk (1975) 2 W.L.R. 1 at p. 8 per Lord Wilberforce for the Privy Council: -

• ... when a statute prescribes a mode of exercise of the statutory power that mode must be followed and observed, and if it contemplates the making of decisions, or the use of discretions, at particular stages of the statutory process those decisions must be made, and the discretions used, at the stages laid down. From this it follows that the freedom of the Minister or officer of the Crown responsible for implementing the statute to make his decisions, or use his discretions, cannot validly be fettered by anticipatory action;...

8. The taxpayer was born and spent his early years in a country in Northern Europe. He is an industrious man and has carried out his rural activities on the subject land in a proper manner and has sought and applied the advice of State agricultural officers. He could do no more than he has done to establish his venture within the limits of his meagre resources and to the extent that this parcel of land is capable of development by the labour of himself, his wife and friends. He has purchased equipment where necessary, e.g., two rotary hoes, the recent replacement costing $1,300. His outlays for fertilizers and vegetable seeds are remarkably low but I do not draw any inference that he has failed to conduct his venture in a good husbandlike manner, if that be material though doubtless it is relevant.

---

ATC 102

9. Although the evidence is imprecise it seems that five acres more or less have been taken out of scrub land and developed as an orchard and carry about 150 trees, say 65 orange trees, 40 apple trees and other trees which provide respectively lemons, plums, pears, peaches, etc. The trees are widely spaced and a vegetable garden (for example at times two acres of peas) is cultivated in the same area. The taxpayer and his wife have had their home on this land for many years.

10. The taxpayer found, contrary to his experience in his home land, that in New South Wales he could not sell directly to shopkeepers or to other trade sources fruit which was ungraded in size and quality. The buckets of fruit which were obtained, daily at times, could usually only be sold in relatively small quantities directly to the public and to friends and relatives. On occasions boxes of fruit, perhaps also boxes of vegetables, have been sold to persons with a view to a later retail sale. On a few occasions some of the crops from the vegetable garden were sold commercially in the usual way (though not in the years in issue) and on a few occasions fruit was also marketed commercially (though not in the years in issue). From 1968 to 1973 respectively the gross receipts were $12, $21, $31, $34, $39 and $49. Quantities of fruit, vegetables also, were bartered by the parties for other produce which they needed for their household. In 1974 a composite figure ($130) is given for gross income plus the value of fruit and vegetables exchanged for other produce; so also for 1975 ($155) and 1976 ($187) and each of these two amounts included the value of produce given away. Persons who assisted in the work of the orchard, picking fruit, etc., have been rewarded in kind. The taxpayer and his wife have also made gifts from time to time of the farm produce to those whom they have seen to be in need of such help. The Commissioner's representative demonstrated in cross-examination that the partners' figures are not reliable. The discrepancies do not always favour one side and as they are minor I disregard them.

11. The statement that a business may be carried on in a small way (cf.
Thomas v. F.C. of T. 72 ATC 4094 at p. 4099; (1972) 46 A.L.J.R. 397 at p. 401 ) does not contain any principle of law. It is only an observation based on common experience. This is vastly different from what was discussed in
Fairway Estates Pty. Ltd. v. F.C. of T. 70 ATC 4061 at pp. 4067-4069; (1970) 44 A.L.J.R. 307 at pp. 310-311 . In Fairway Estates the Court was concerned with a proprietary company which had been incorporated with the primary object of moneylending as a business and had considerable funds available when it made a loan of substantial amount. There was the unquestioned purpose of the company of setting up a business of some magnitude and the first transaction by the company was held to be indicative of the commencement of that business. The ``purpose'' as shown by Thomas has to be to carry on activities which have a significant commercial character.

12. The ratio decidendi of Fairway Estates has no application where the question in issue is whether the activities have a significant commercial purpose or character.

13. The Board is not concerned here with the undoubted proposition (per Jacobs J.
London & Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 at p. 4410 ) that every business must begin with an initial transaction (cf. Latham C.J.
Western Gold Mines N.L. v. C. of T. (W.A.) (1937-1938) 59 C.L.R. 729 at p. 733 ). It is clear that frequency of an activity (i.e., of the relevant kind) is not synonymous with business (per Jacobs J. ibid ). There may be no business despite the frequency, and on the other hand there may be a business where the activity is an isolated one (per Jacobs J. ibid ). The scale of activities does not itself provide an answer to the question in issue although it is very important evidence (per Jacobs J. at p. 4411).

14. The question of business or no business is to be decided by the objective test. Though in the absence of any other evidence the taxpayer's subjective view that he has a business may suffice (cf.
Martin v. F.C. of T. (1952-1953) 90 C.L.R. 470 per Webb J.) provided that his evidence is consonant with the attributes of the transaction. But generally the applicable principle is as set out in
I.R. Commrs. v. Livingston (1927) 11 T.C. 538 where the Lord President Clyde said: -

• I think the test which must be used to determine whether a venture such as we are now considering is, or is not, ``in the nature of trade'' is whether the operations involved in it are of the same kind and carried on in the same way as those which are characteristic of ordinary trading in the

  ---

  ATC 103

  line of business in which the venture was made.

See further
J. & R. O'Kane v. I.R. Commrs. (1919-1922) 12 T.C. 303 per Lord Buckmaster : -

• The intention of a man cannot be considered as determining what it is that his acts amount to.

See also
Robert G. Nall Ltd. v. F.C. of T. (1936-1937) 57 C.L.R. 695 at p. 711 where Dixon J. (as he then was) said in respect of Lord Sumner's dictum in
I.R. Commrs. v. John Blott (1921) 2 A.C. 171 at p. 218; 8 T.C. 101 at p. 145 : -

• But in matters of income tax purpose is an elusive and indefinite criterion. The purpose of a payment when a deduction is claimed for it becomes an attribute of the transaction rather than a state of mind of some actual person.

As to the difference between factual intention and desire see
Lang v. Lang (1954) 3 All E.R. 571 at p. 581 and
Cunliffe v. Goodman (1950) 2 K.B. 237 at p. 253 .

15. The taxpayer expressed his intention variously, e.g.: -

• He would be happy if they could break even - if the partnership could get back in money what is outlaid in money;
• To get at least one part of his income so his wife should not work.

16. Of course it would be begging the question to say that as a partnership is formed with a view to having a business therefore whenever there is a partnership then there is a business. To adopt that line of argument is to ignore the need for application of the objective test and of proof of a significant commercial purpose.

17. The expression ``engaged in primary production'' refers to the business purpose of the taxpayer (
Southern Estates Pty. Ltd. v. F.C. of T. (1967) 117 C.L.R. 481 at p. 493 ). It is clear from Thomas supra by reason of the phrase ``significant commercial purpose or character'' that the question in issue is not dependent upon a dichotomy of business venture or hobby/pastime, i.e., it is not enough for a taxpayer to believe and assert that he is not engaged in a hobby or pastime. Furthermore a sale commercially on a few occasions of the produce from the land does not per se give a significant purpose or character of a commercial enterprise; the conduct of a venture in a businesslike way is not decisive of the question in issue, though it is important.

18. Southern Estates Pty. Ltd. supra was applied by Helsham J. in
Greenville v. Commr. of Land Tax 7 A.T.R. 278 at p. 280 . See further Geddes v. Blacktown Municipal Council (1977) 1 N.S.W.L.R. 683 where cattle were run on land but not by way of a business of grazing. See also
McInnis v. F.C. of T. 77 ATC 4167 where a medical practitioner agisted several head of cattle on the town common and was held not to be in the business of primary production: see further
Inglis v. F.C. of T. 77 ATC 4305 where the appellants had been assessed from 1951 to 1972 on the basis that they were carrying on a grazing business and they maintained that they never forsook that business but were held not to be in that business in the three ensuing years in light of the small extent of their operations.

19. In Greenville supra Helsham J. in his consideration of the Land Tax Management Act 1956 sec. 10(1)(p) said: -

It would probably not be sufficient to look merely at the financial return from the cultivation; the fact that there was none would not of itself warrant a finding that the land was not used primarily for cultivation, nor would the existence of a more rewarding cottage industry carried on by the owner of the land at the same time. Likewise the quantity of produce of the cultivation taken from the land would not of itself be a determinant of its primary use. The matter will be one of degree in each case.

20. There are instances not in pari materia where the word ``business'' does not import the concept of profit (
Rolls v. Miller (1884) 27 Ch.D. 71 ;
Town Investments Ltd. v. Department of the Environment (1976) 1 W.L.R. 1126 at p. 1144 ). The fact that a property will be incapable of ever providing fair monetary returns for the orchardist, dairy farmer, grazier, oyster-bed lessee, etc., who conducts it as a full-time or part-time occupation is but one of many factors for consideration (cf. the financial position of the coffee shop proprietor in
The Commonwealth v. Reeve (1949) 78 C.L.R. 410 ). If the activities carried on have the indicia of a business (e.g., a significant commercial purpose or character)

---

ATC 104

it is of little consequence that despite continuance for many years a profit has not been shown and none is presently envisaged (cf.
Tweedle v. F.C. of T. (1942) 7 A.T.D. 186 at p. 190 where the appellant, in contra-distinction to the present taxpayer, held a genuine belief that he would be able eventually to make the business pay). In
Cooney v. Kuring-gai Municipal Council 37 A.L.J.R. 212 the complaint of the Council was that the householder was using the land and premises for the purposes of ``the trade or business of providing at cost refreshments and entertainment at social functions held therein''. It was held by Kitto, Taylor, Menzies and Windeyer JJ., with Dixon C.J. dissenting, that the use fell within a proclaimed description of ``trade''. Menzies J. (at p. 219) said that the word ``business'' would describe more accurately than the word ``trade'' the appellant's activities upon the premises. He added that he was disposed to think that it could be said without extravagance that the appellant was using the premises for systematic work of a productive character for reward; a description which he thought would bring the activities within the common understanding of what is meant by an industry. ``Reward'' may be taken to mean (vide
Commr. of Prices and Consumer Affairs (S.A.) v. C. Moore (Aust.) Ltd. 51 A.L.J.R. 715 ) a recompense which is not of the nature of a payment or a benefit or advantage which is not measurable or quantifiable - a commercially valuable benefit or advantage. It was not to the point that the appellant in Cooney dealt only with persons known to her or introduced by persons known to her and that sometimes charity functions were gratuitously held upon her premises: the business or trade existed because of the frequency of the functions and having regard also to the character of the occurrences. Something may be said to be done gratuitously where it is done as an act of social kindness or by way of charitable intent in case of need and where nothing of material advantage to the disponor is received (cf.
F.C. of T. v. McPhail (1968) 117 C.L.R. 111 at pp. 115-116 ).

21. In all years expenditure by the partners has greatly exceeded the returns. The taxpayer's hope has been and continues to be little more than that he will get back in money what he outlays in money. Thus Tweedle's case (supra) , so often cited for the limits of the powers of the Commissioner in respect of a losing concern, is not in point as there was in Tweedle and there is not here a belief that eventually the owner will be able to make the business pay, in the ordinary sense of a paying proposition.

22. The context in which Walsh J. made the observation that a man may carry on a business in a small way was not merely that the scale of production was much greater than was required for domestic needs (that frequently occurs with householders in semi-rural areas and a sale at intermittent times of produce commercially as well as to friends and casual customers is commonplace). More importantly the gravamen of the judgment in Thomas is that the appellant ``expected upon reasonable grounds that their produce would... yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money and that this return would continue for a very long time.'' Accordingly there was in Thomas , and there is not in the present references, an enterprise with ``a significant commercial purpose or character''. Fairway Estates supra is not in point because the issue there was not whether the indicia of a business (i.e., of a commercial enterprise) were present, but merely whether a particular event heralded the commencement of an undoubted projected business of considerable magnitude.

23. I would uphold the decision on the objection for the year ended 30 June 1973 and confirm the assessment.

24. I would uphold the decision on the objection for the year ended 30 June 1974 and confirm the assessment.

Claims disallowed