Fielder Downs (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation.

WB Campbell J

Supreme Court of Queensland

Judgment date: Judgment handed down 9 February 1979.

Campbell J.: These are three appeals by the taxpayer company Fielder Downs (W.A.) Pty. Ltd. (``The company'') against assessments of income taxation by the Commissioner of Taxation in respect of income derived by the company during each of the years ending 31 October 1971, 1972 and 1973. Precisely similar issues of fact and law arise in each appeal and, by consent, they were heard together.

In December 1966 the company purchased eight contiguous blocks of land totalling 17,778 acres located in the southern part of Western Australia some hundreds of miles east of Perth in the Esperance area. The lands comprised part of the ``Bedford Harbour'' sub-division. At that time the company was a subsidiary company of George Fielder and Co. Ltd. being one of the George Fielder group of companies. The group was concerned essentially with the growing of grain, fodder and seeds, the sale of seeds and of the food products from grain such as flour milling, bread manufacture, the making of dry stock feeds, and pig breeding activities. As I indicate later on in my findings of fact, the company commenced a pastoral seed production enterprise on the Bedford Harbour lands.

Prior to the purchase Dr. Millington, who was an agronomist in charge of a clover breeding programme at the University of Western Australia, had approached George Fielder and Co. Ltd. with information about the development of a new type of subterranean clover known as ``uniwager'', which could reduce clover infertility disease in ewes. In about November 1966 the company arranged to obtain some seed from the University and sent this seed for sowing in India in order to obtain from the Indian crop sufficient seed for sowing in Western Australia during May 1967. Otherwise, the company would not have been able to market its own clover seed until February/March 1969.

A term of the purchase contract was that one-third of the total purchased area, which was all virgin land with one-third of it being semicleared, had to be sown to pasture or crop within twelve months. About May 1967 the company completed the clearing on one-third of the land with the intention of sowing the new type of clover.

Dr. Millington, whose field of expertise was in clover seed production, joined the staff of the company as its general manager, but the Indian crop was a failure and the company was unable to sow the land with it. In order to comply with the purchase condition which I have mentioned, it sowed wheat in the one-third area of the eight blocks, this wheat being harvested in late 1967 and sold to the Australian Wheat Board. In May 1968 some other varieties of clover were sown on 6,000 acres, and in that year further lands were cleared for further sowing of clover. The 6,000 acres were harvested in November/December 1968.

In November 1967 the company purchased 36 acres of land at Wanneroo, near Perth, which was used for clover plant breeding. Dr. Millington was unsatisfactory as a manager of a large acreage and the company confined his activities to the Wanneroo property. Mr. Crossley was appointed general manager of Bedford Park in February 1968. Towards the end of 1968, a decision was taken by the Board of Directors of George Fielder and Co. Ltd. to sell the lands at Bedford Park. By an agreement in writing dated 3 March 1969 (ex. 4) all the shares in the company were sold to a subsidiary

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company of the Australian Agricultural Company Limited, and George Fielder & Co. Ltd. agreed to purchase, prior to the date of settlement, from the company all its lands and plant situate at Wanneroo. The date of settlement was 17 March 1969. At a meeting of directors of the taxpayer company held on 17 March 1969 it was resolved that the transfer of shares to the new owners be approved.

The company had made considerable losses from its operations at Bedford Harbour prior to the change in the beneficial ownership of its shares and these losses were claimed by it as deductions during the income years which are the subject of these appeals, pursuant to the provisions of sec. 80 and 80AA of the Income Tax Assessment Act 1936 (as amended). The Commissioner claims that sec. 80E of the Act is not applicable and, in the notices of decision on the company's objections, he alleges:

``(a) the company, after the change of shareholders, did not carry on the same business as the business (if any) it carried on immediately before the change. In this connection the view is taken that the company's business after the change was that of a grazier whereas its earlier business was clover seed production;

(b) that the company, after the change of shareholders, derived income from a business it did not carry on, and/or from a transaction of a kind it had not entered into in the course of its business operations, before the change took place. In this context the operations of the company relative to the business it conducted in partnership (South Galway Trading Company and Argyle Downs Station partnerships) and from which it derived income after the change of shareholders are relevant.''

The sec. 80E provisions were first inserted in the Act in 1965, but a new subsec. 80E(1) was substituted for the previous subsec. (1) by the Income Tax Assessment Act 1973. However, such changes as are contained in the 1973 amendment, which is not applicable to the 1971 and 1972 financial years, are not relevant to the issues before me. The material words of the subsection, which provides that losses of previous years may be taken into account for the purposes of sec. 80 or 80AA where there has been such a change in the beneficial ownership of shares as has occurred in the instant case, are para. (b) and (c) which require that:

``(b) the... company carried on at all times during the year of income the same business as it carried on immediately before the change referred to in paragraph (a) took place; and

(c) the... company did not, at any time during the year of income, derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the change took place.''

The questions for my determination are whether, within the meaning of sec. 80E(1), the company has carried on at all times during all or any of the three relevant income years ``the same business'' as it carried on immediately before March 1969, and whether at any time during each of those years it has derived income from ``a business of a kind'' that it did not carry on, or ``from a transaction of a kind'' that it had not entered into in the course of its business operations, before March 1969.

The evidence has persuaded me to find the following facts. The company purchased the land for the purpose of growing and selling uniwager clover seed; its aim was to develop the land as a clover seed project. Upon the failure of the Indian crop it sowed wheat in order to comply with the condition of purchase, and then went back into clover. There were no company stock on the property prior to the change in shareholding. I accept the evidence of Mr. Moore that the company had been advised that the land would ``in the long term - sooner or later'' have to be put on to cattle or sheep or some other use. The evidence shows that it is desirable to graze subterranean clover pasture for a number of reasons, namely, to increase the quantity of seed set, to prevent the onset of fungus diseases, to prevent re-growth of native plants and to keep out grasses and other weeds, and to have an income from stock to supplement the income from the sale of seed. I accept that it is impracticable in the long term to run a large clover seed production in the absence of livestock as part of the pasture control programme.

On 9 November 1967 an agronomist, Professor Crofts, was appointed as a consultant to the project. Mr. Moore, who was in effect acting as the managing director of the company caused to be prepared a liquidity forecast (ex. 13) as at October 1967, which covered the period up to June 1971. That forecast did not include or make reference to any expected revenue from livestock. That document was studied by Professor Crofts who, in a letter dated 31 October 1967 (ex. 12) written to the

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Chairman of George Fielder & Co. Limited, commented that the forecast predicted ``increasing indebtedness to January 1970 and then virtual recovery by June 1971''. On the assumption that the forecast was correct to within ``20% of actual'', the Professor advised that it would be unwise for the company to dissipate its efforts on other cropping or livestock enterprises unless they were ``fully complementary to the main seed production enterprise''. In that letter he suggested that sheep could be brought on to the broad acres in order to keep capital and labour costs to a minimum. He advised that ``it would be most unwise, at this stage, to further complicate the operation by adding livestock enterprises to it.'' In a memorandum to directors dated 3 November 1967 (ex. 11), the Chairman appears to have agreed with Professor Crofts that no livestock should be brought on to the property, other than sheep for two months of the year to act as foliage mowers.

In August 1968 Mr. Crossley, at the request of Mr. Moore, submitted a proposal (ex. 6) on the profitability of utilising the Bedford Harbour site for cattle raising, or alternatively sheep raising. This was a ten-year plan. Prior to the change nothing was done to implement these proposals. By letter dated 30 August 1968 written to Professor Crofts (ex. 14), Mr. Moore informed him that the Board had decided not to harvest any clover seed in the next harvest period from November to February except 210 acres. He pointed out that the company would have to spend approximately $220,000 in purchasing the necessary equipment and incurring harvesting operation costs. He stated that the wise decision was to let the status quo remain for the next harvesting season. He requested Professor Crofts to give the company his thoughts on the figures submitted by Mr. Crossley. Professor Crofts made certain comments on the Crossley proposals by letter dated 3 September 1968 (ex. 8).

Mr. Moore caused to be worked out what it would cost to implement the Crossley proposals, and the Board then came to the decision that the cost of stocking the property was beyond the financial ability of the company at that time. It was then that the decision was taken to find a buyer for the whole of the property. The sale brochure was then prepared by Mr. Moore, in which document it was stated, inter alia, that, prior to the purchase of the land at Bedford Harbour, an assessment of the project revealed that it could be developed in three stages, namely, first to develop the land as a clover seed project over approximately four years, second, after four years of clover seed harvesting when subsequent seed harvesting becomes uneconomic, a gradual conversion of each particular area to livestock operations as each area completes the four year cycle of seed harvesting, and finally, the eventual sale of the fully developed property with the purpose of obtaining capital gain. The brochure also stated that a prospective purchaser would have three options - (a) continuing with clover seed farming with gradual transfer to livestock, or (b) immediate livestock farming, or (c) livestock farming with clover seed harvesting as a sideline. This document was signed in the witness box by Mr. Moore who said that the statements of fact in it were within his knowledge.

After the sale of the shares the company sowed with pastures the areas which had previously been ploughed, fallowed and cleared more areas of virgin country and ploughed them in order to prepare them for pastures. Since the sale crops have been grown for grain production and also for hay making. Since 17 March 1969 the company has grown crops of barley, oats, wheat and a few trial areas of other cereals. Mr. Schmidt, the managing director of the company since the change of shareholders, gave evidence to the effect that after the sale the company continued the development until such development was completed in 1974. At that time the whole of the 17,000 acres was either under clover or under some cereal, or resting. On occasions during that period the company has sold clover seed which was harvested by share farmers, but in most of the years since 17 March 1969 it has not sold clover seed. The company does not itself have the machinery which is necessary for the harvesting of clover seed. Since the change the company has continuously grazed the property apart from the areas which have been set aside for cereal production and, of course, apart from those areas in which there is a spelling of the land. It began stocking the property in May 1969, both sheep and cattle were brought on to the property and one or other or both have been there ever since. Since the change the company can properly be said to have carried on grazing operations at Bedford Park. Moreover, since the change the company has entered into two partnerships, one with Cooper River Pastoral Co. Pty. Ltd. in a business styled ``South Galway Trading Company'', and another known as the Argyle Downs Partnership. Both these partnerships are cattle grazing partnerships. In each case the other partner is a subsidiary company of the Australian Agricultural Company.

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As I have said, the ``continuity of business'' test, laid down in sec. 80E(1) has three requirements which are cumulative, namely, the carrying on of the same business before the change of ownership, no derivation of income at any time during the year of income from a business of a kind that the taxpayer did not carry on before the change, and no derivation of income at any time during the year of income from a transaction of a kind that it had not entered into in the course of business operations before the change. I propose to consider the provisions of para. (b) and to express my view as to whether the business carried on during the relevant years by the company was the same business which it carried on immediately before the change in shareholding. This involves a factual inquiry:
Avondale Motors (Parts) Pty. Ltd. v. F.C. of T. 71 ATC 4101, at p. 4105; (1971) 124 C.L.R. 97, at p. 104 (per Gibbs J.);
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; (1975) 132 C.L.R. 175, at ATC pp. 4065-66; C.L.R. p. 188 (per Barwick C.J.), and at ATC p. 4072; C.L.R. p. 199 (per Mason J.);
J. Hammond Investments Pty. Ltd. v. F.C. of T. 77 ATC 4311, at p. 4315 (per Sheppard J.). Before considering this issue of fact I will refer to the judgment of Gibbs J. in Avondale Motors (Parts) Pty. Ltd. v. F.C. of T., where his Honour discussed the meaning of the words ``the same business as'' in the context of sec. 80E(1)(b).

His Honour said, at 71 ATC p. 4106; 124 C.L.R. p. 105:

``The meaning of the phrase `same as', like that of any other ambiguous expression, depends on the context in which it appears. In my opinion in the context of the section the words `same as' import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. It seems to me natural to read the section as referring to the same business, in the sense of the identical business, and this view is supported by consideration of the purposes of the section. The relevant sections of the Act show an intention on the part of the legislature to impose, in the case of companies, a special restriction on the ordinary right of a taxpayer to treat losses incurred in previous years as a deduction from income.... However the restriction if imposed absolutely would lead to injustice in cases where a company, notwithstanding substantial changes in the ownership of its shares, continued to carry on the same business. No injustice would, in my opinion, result from a refusal to treat an accrued loss as a tax deduction where the company after the change carried on a different business, although one of a similar kind.''

Later on in his judgment, at ATC p. 4106; C.L.R. p. 106 his Honour said:

``It does not, of course, follow that a business will not be the same because there have been some changes in the way in which it is carried on; some cases under sec. 80E may give rise to questions of degree which do not arise in the present case.''

It was submitted by Mr. Pincus, on behalf of the appellant, that, prior to the change, the predominant feature of the company's operation was growing pasture and, although not stocked at the material time in due course it would have been stocked, and the stocking of such a property was inherent in the management of it. He contended that, if there had been no sale and the company had purchased stock, as it would have done, the business could not then have been described as a different business; grazing was inherent in the very nature of the business at all times; the proper approach was to look at the whole project in a commercial and realistic way; prior to the change the business was in the process of development and the evolution of growth of the business was a continuing one; the company's operations were such as to involve, in the ordinary course of its undertaking, the growth of pastures suitable for both seed production and fodder and the fact that the company had not actually acquired any livestock by the date of the change was, in the circumstances, irrelevant; it was an agricultural business which should be characterised by looking at its natural process of evolution.

A consideration of the facts in the present case has led me to the conclusion that the company did not carry on at all times during the respective years of income the same business as it carried on immediately before the change in shareholding took place. Before the change the company carried on a business of a pastoral seed and grain producer. Indeed, it described the nature of its business in its income tax returns for the years ending 30 June 1967 and 30 June 1968 as one of ``pasture seed production''.

In the Directors' Report presented at the annual general meeting on 4 October 1967 (ex. 17) it was stated that ``... the company commenced operations in Western Australia, and an amount of $140,920 was expended on land development and establishment costs

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relating to this pastoral seed undertaking''. I accept that the company had envisaged that it would, after the passage of several years, gradually go into the business of grazing but the fact is that at no time prior to the change had it gone into the grazing business. Before the change it allowed on the Bedford Park property some stock from neighbours without charge to those neighbours. This was done so that the clover runners would be forced onto the ground by the stock and the stock would eat the trash on the surface. Mr. Moore agreed that the expression ``pastoral seed producer'' was a correct description of the business of the company prior to the change.

In my opinion, there is a distinction between the kind or character of a rural business of which the proprietor is described as a pastoralist or a grazier, on the one hand, and one where he is categorised as a producer of, say, fruits, vegetables, fodder or seed, on the other. The nomenclatures used to describe rural activities frequently overlap, e.g., a ``grazier'', a ``sheep farmer'', a ``squatter''. In Webster's New International Dictionary (2nd ed.) the following definitions appear: ``Pastoralist'': `A breeder and pasturer of sheep or cattle; a shepherd; specific., Australia, a stationholder who raises livestock, esp. one who does no farming; ``Grazier'': ``In Australia, a person occupying Crown or other land for sheep raising;'' ``Squatter'': ``Squatter is giving way to the newer terms pastoralist and grazier, Australia.'' The Shorter Oxford English Dictionary defines ``Pastoralist'' as ``one who lives by keeping flocks of sheep or cattle; spec. (Australia) a sheep-farmer, a squatter,'' and ``Grazier'' as ``one who feeds cattle for the market''.

Although dictionary definitions may be of assistance in some cases, it seems to me that the determination of the issue whether the business carried on by the company in each of the three relevant years was the same business, or one of a similar kind, as was carried on by it before March 1969 depends upon an investigation of fact so as to characterise the kind of nature of the business which was undertaken during each respective period. Before the change the company was engaged in growing clover and cereals for the sale of seed and grain, it was not then growing its clover pasture for the breeding or fattening of stock for sale. In view of the plain words of para. (b) of sec. 80E(1), ``The same business as it carried on immediately before the change'', the fact that, had it continued with the development over a period of time of its pastoral business at Bedford Harbour it would inevitably have gone into the grazing business, the raising or the keeping on the property of large numbers of stock for money-making purposes, does not seem to me to be decisive of the issue. If a business evolves it does not necessarily follow that during such process of evolution the essential character of the business is not changed. It would not be difficult to give illustrations in support of this proposition. Moreover, although many business pursuits or occupations may be correctly included in a broad description such as ``agricultural'', ``retailing'', etc., they may be substantially different in kind from others which are in the one general category.

There is no evidence that after the change any clover seed was sold in the relevant years, 1971, 1972 and 1973. Consequently, the company cannot be said to have been engaged in the seed selling business during those years. As can be seen from the company's income tax returns during those years the company received income from the sales of its Bedford Park cattle as well as from the sales of cattle belonging to the two partnerships to which I have referred, and also from its sales of wool. It was clearly engaged in the business of a grazier or pastoralist and not in the business of producing pastoral seed. Further, immediately before the change the company was not engaged in the production of cereals as this cereal growing had been done at an earlier stage in order to comply with the condition of purchase. In my opinion the company did not carry on any grazing or livestock business during the years prior to the change; such livestock as were then on the property were there merely to assist in the clover seed production.

On the evidence it seems to me that, prior to the transfer of shares, the company had not formed an intention that it would carry on a grazing business on its lands at Bedford Park. It appears that it appreciated that eventually these lands would be used as a grazing enterprise but it did not itself have the intention at any time prior to the change to use them for a grazing business. Prior to the change it was engaged in the pursuit of developing and growing clover seed which was to be marketed commercially, and until the change in shareholding took place its business could not be characterised as that of a pastoralist or of a grazier.

In (ex. 12) Professor Crofts advised the company against turning the property into a livestock enterprise or even adding a livestock enterprise to it, and he was appointed as a consultant after that report. It is significant that

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when the company gave consideration to the Crossley suggestion that the property be used for cattle or sheep raising, namely, a grazing venture, such proposal was rejected and the property was then sold.

I do not think this is a case of the same business simply being carried on in a different fashion after the change-over. After March 1969 the character of the business was completely changed in that stock was brought onto the property, fencing and water improvements were made to provide for the stock, and, although clover pastures were maintained and substantially increased in area, the whole income-making emphasis was changed from one based on the growing and harvesting of clover seed for sale to one based on the grazing of stock on pastures of clover and other fodder, such as oats. Therefore, whether the criterion for the application of sec. 80E(1)(b) be identity of the business (as Gibbs J. considered it to be in the Avondale Motors case) or their similarity, in a substantial way, it is my opinion, for the reasons I have given, that the business carried on in the relevant income years was not the same business, merely being carried out in a different way or by changed methods, as the business conducted by the company immediately prior to the sale of its shares; nor could the later business be said to be one substantially similar in its nature to the earlier pastoral seed business.

Because of my view that the business carried on by the company in the relevant years of income was not ``the same business'' as that carried on by it immediately before the change, it is unnecessary for me to consider whether the provisions of para. (c) of sec. 80E(1) would, in the circumstances, prevent the taxpayer from carrying forward the losses of previous years. However, it seems to me that during the relevant years the company derived income from a transaction of a kind that it had not entered into in the course of its business operations before the change in shareholding took place, namely, the sale of cattle, and so the second leg of para. (c) would be a bar to the company's claim to carry forward the material losses.

If the business carried on beforehand should properly be held to be a business of the development of pastoral land for the eventual grazing of stock and one which was at all material times the one and the same business continuing from its commencement until the lands were fully developed and stocked, it seems to me that the transaction of selling cattle (or wool or sheep) was a transaction of a kind that the company had not entered into in the course of its business operations of developing the property prior to the sale. There is a difference in kind between a dealing or transaction concerned with the selling of seed or cereals for income and a dealing involved with obtaining income from the sale of stock. In J. Hammond Investments Pty. Ltd. v. F.C. of T. (supra) Sheppard J. at p. 4318 expressed the view that the second limb of para. (c) ``is not intended to refer to the daily transactions involved in carrying on a business but to transactions of an isolated and independent kind, which transactions have nevertheless arisen in the course of the taxpayer's business operations''. I think that the second limb of para. (c) contemplates that the transaction not previously carried on was one which could have been carried on in the course of the company's business operations prior to the change-over. Sales of stock had not been carried on prior to that time, and indeed prior to that time the company had no stock available which it could have sold. So, it seems to me, that the sale of stock was a transaction of a different character from any which had been previously entered into by the company.

I think that the view taken by the Commissioner is correct in law and I dismiss the appeals.

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