Inglis v. Federal Commissioner of Taxation.Judges: St John J
Federal Court of Australia
Brennan J.: This is an appeal from a judgment of the Supreme Court of New South Wales ( Sheppard J. sitting in the Administrative Law Division), dismissing four appeals to the Supreme Court against the disallowance of objections to assessments to tax of the appellant and her late husband (of whose estate the appellant is the executrix) for the income years ended 30 June 1974 and 30 June 1975. The appellant and her husband were the owners of a pastoral property ``Lammermuir'' situated on the banks of the Derwent River. It is common ground that Mr. and Mrs. Inglis carried on a pastoral business on Lammermuir for a time, but Sheppard J. found:
``that pastoral activities and thus all primary producing activities ceased on this property about the beginning of the income year ending 30th June 1970. In other words by the end of the calendar year 1969 all pastoral and thus primary producing activities on this property had ceased.''
The partnership returns for the 1974 and 1975 years sought the allowance of deductions under sec. 51 of the Income Tax Assessment Act 1936 in respect of certain outgoings related to Lammermuir and, under sec. 54 of that Act, the allowance of a deduction for depreciation on plant which was on Lammermuir during the relevant income years. The deductions were claimed on the footing that a business of primary production was being carried on at Lammermuir during the relevant income years.
The facts relating to the carrying on of a business on Lammermuir are recounted in the judgment of Davies J. which I have had the advantage of reading. It is unnecessary to repeat them here. Those facts amply support the finding made by Sheppard J. that pastoral and primary producing activities on Lammermuir had ceased prior to the commencement of the relevant income years.
Nevertheless, the appellant submits that the partnership had not ceased to carry on business at Lammermuir. In giving evidence she said:
``... we always meant, although by circumstance forced us in just those two or three years - actually since 1969 - for prudence sake because these were years when we were fighting the Commonwealth Trading Bank with everything we had - in prudence sake to restrict expenditure. Nevertheless it was always our intention - and I will here bring evidence to show that we intended to continue that as soon as it was possible - it was not a matter of ceasing at all, it was a matter of prudently drawing in and waiting until we could finalise the litigation and get over the expenses with respect to that.
Your Honour will appreciate that there are very high expenses in respect of litigation.''
Sheppard J. found [77 ATC at p. 4308]:
``It seems to me that I should accept Mrs. Inglis' evidence to the extent that she and her husband had some intention at some time in the future when perhaps things improved for them, or at least their minds were not diverted by the litigation in which they were engaged, of eventually returning to the property and recommencing their operations. But although they may have had that intention, it seems to me that the facts here point unmistakably to the situation that really by the end of 1969, all pastoral activities having ceased, no business was in fact being carried on upon the land.
Mrs. Inglis has relied strongly upon the fact that she and her husband had the intention to which I have referred, but I do not regard that, in the light of the facts of this case and the long period, some three years before the commencement of the 1974 income tax year, during which there was no activity, as being sufficient to show that there was continuously, as Mrs. Inglis submits, carried on on this property the pastoral business which she said in her evidence and submissions has never ceased. I am therefore of the opinion that Mrs. Inglis has failed to establish what it was necessary for her to establish to be successful in this case, namely, the existence of a business in the relevant tax years.''
His Honour's observation that it was necessary for the appellant to establish the existence of a business in the relevant tax years followed upon his view, earlier expressed, that the appellant's case found its best support in the second limb of sec. 51(1). However, the appellant, who argued her own case before this Court as well as before the Supreme Court, chose to rely on both limbs of sec. 51(1) and both limbs should be considered accordingly.
As to the first limb, an outgoing may be ``incurred in gaining or producing the assessable income'' although no income is gained or produced during the year in which the outgoing is made. In
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 ; (1975) 132 C.L.R. 175 Mason J. said (at p. 4071; 197):
``It is inconceivable that Parliament intended to confine deductions to losses and outgoings incurred in connection with the production of income in the year in question and to exclude losses and outgoings incurred in connection with the production of income in preceding or succeeding years.''
Barwick C.J. agreed with this construction of the first limb, and added (at p. 4064; 185):
``It is not possible now, to construe sec. 51 to mean that the expenditures and losses to be deducted must relate precisely to the assessable income which is returned for a year in which the expenditures are made or the losses are suffered. In the application of this unduly condensed provision, it has not been possible to utilise the definite article so as to require the expenditure in question to have produced or to have assisted to produce the assessable income of the particular year of the expenditure.''
The first limb thus provides for the deduction of an outgoing incurred in gaining or producing assessable income, whether the income is the income of a previous income year, the income of the current income year, or the expected income of a future income year.
There must, of course, be a connection between the incurring of the outgoing and the gaining or production of the relevant income. Where income has been produced or is being produced, reference may be had to the means of its production in order to ascertain whether the necessary connection with the incurring of the outgoing appears. If the incurring of the outgoing is ``incidental and relevant to the operations or activities regularly carried on for the production of income'', the relevant connection appears (see per
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290 at p. 305 ). The connection is with the operations which more directly gain or produce the income (
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344 at p. 351 ).
There were, as his Honour found, no income-producing activities on Lammermuir during the relevant income years. There were
ATC 4004thus no operations on Lammermuir during those years with which the necessary connection might be established. And the earlier income-producing activities on Lammermuir were so remote in time that no connection between the claimed expenditures and the earlier operations appears. The existence or otherwise of the necessary connection is a question of fact (
F.C. of T. v. Gordon (1930) 43 C.L.R. 456 at p. 462 ), and the appellant has not shown that the making of expenditure on any relevant item was incidental or relevant to the operations which, in earlier years, produced assessable income.
Where income has not yet been gained or produced, the relevant connection must be with the operations and activities which are expected to produce that income. In
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 the Court said (at p. 57):
``In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''
The connection is not shown by reference to the purpose for which the relevant expenditure is made, but by reference to ``the essential character of the expenditure itself'' (
Lunney v. F.C. of T. (1958) 100 C.L.R. 478 at p. 497 ).
In the present case, the expenditure for which deductions were claimed may have been incidental or relevant to the preservation of Lammermuir as a pastoral property. But expenditure on or in connection with Lammermuir does not become expenditure incurred in gaining or producing future assessable income merely because the taxpayer intends in the future to use Lammermuir to produce assessable income. If a capital asset is not being used to produce assessable income, though it is intended for use in the future to produce assessable income, expenditure in merely preserving the asset until it is so used is not deductible. Rather, being expenditure upon a capital asset not employed in producing income, it has the character of a capital outgoing. The expenditure related to Lammermuir appears unconnected with any activity for the production of future income, and does not qualify for deduction under the first limb of sec. 51(1).
Whether any of the outgoings qualify for deduction under the second limb of sec. 51(1) depends upon whether a pastoral business was being carried on during the relevant years: ``the outlay must have been incurred in the
of a business, that is, it must be part of the cost of trading operations'' (per
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 at p. 49 ). The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. Little activity may suffice for carrying on a business which does not call for much activity, as in
Thomas v. F.C. of T. 72 ATC 4094 ; 46 A.L.J.R. 397 and in
Ferguson v. F.C. of T. 79 ATC 4261 . It must be remembered that ``(b)usiness is not confined to being busy; in many businesses long intervals of inactivity occur'' as Lord Sumner observed in
South Behar Ry. Co. Ltd. v. I.R. Commrs. (1925) A.C. 476 at p. 488 . In
Southern Estates Pty. Ltd. v. F.C. of T. (1967) 117 C.L.R. 481 , where the High Court was concerned with the concept of a taxpayer ``engaged in primary production on any land'' (within sec. 75(1) of the Act), McTiernan J. found against the taxpayer, saying (at p. 484):
``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. No work which the partnership did on the land per se amounted to the maintenance of animals, nor was proximate to such business. The purpose for which the work was done did not result in the partnership going into the business of primary production.''
On appeal, Barwick C.J. said (at p. 488):
``I am unable to read `a taxpayer engaged in' as satisfied by one of whom no more can be said than that he intends to engage in.''
Although this was a case under sec. 75, it was regarded as a relevant authority by Walsh J.
ATC 4005when he was considering whether the taxpayer in Thomas' case (supra) was carrying on business as a primary producer.
In the present case, the appellant and her husband had sold the stock and most of the farm implements and had contracted to sell a large part of the land before the commencement of the relevant income years. Pastoral activity had ceased. The business which had been carried on there was no longer being carried on, and an intention to carry on a pastoral business on the remainder of the land at some future time is insufficient to constitute the carrying on of the earlier pastoral business. Lord
J. & R. O'Kane & Co. v. I.R. Commrs. (1922) 12 T.C. 303 at p. 347 :
``... the intention of a man cannot be considered as determining what it is that his acts amount to.''
But even if the intention of the owner is relevant in determining whether a business is merely going through a quiet period, or whether it has ceased, an intention to revive a business in the future does not preclude a finding that it has ceased to be carried on. At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree. In the present case, his Honour found that the business had ceased. That finding was amply borne out by the evidence.
Neither limb of sec. 51(1) warrants the allowance of a deduction in respect of the outgoings in dispute, and the appellant fails on these issues.
Depreciation was claimed upon a windmill and pump, reservoir, fencing, piping, barn and stables, shearing shed and a light and power plant. This plant and machinery had been used in the pastoral business and was suitable for use in such a business if it were again carried on. Depreciation was claimed under sec. 54(1), which provides two bases for deductible depreciation. The first base is that the relevant plant or articles is owned by the taxpayer and is used by him during the income year for the purpose of producing assessable income. The plant and machinery on which depreciation was claimed in the present case were not so used during the relevant income year. The second base is that the plant or articles has been ``installed ready for use for that purpose and is during that year held in reserve'' by the taxpayer. Prior to the income years, the movable farm plant and machinery had been disposed of. Moreover, it appeared that prior to the income years a contract for the sale of a major part of Lammermuir had been entered into, and the appellant had sued for specific performance of that contract. These circumstances are inconsistent with the devotion of Lammermuir to the future production of assessable income by the taxpayer and preclude a finding that the plant and machinery was ``installed ready for use for that purpose'' and was ``held in reserve'' by the taxpayer. The claims for allowance of depreciation fail.
The appeals from the judgments of the Supreme Court disposing of the appeals against the four assessments were consolidated into one appeal by consent. That appeal should be dismissed with costs.