Inglis v. Federal Commissioner of Taxation.Judges: St John J
Federal Court of Australia
Davies J.: This appeal concerns issues raised in Notices of Objection dated 9 August 1975 and 9 April 1976 lodged by the appellant Mrs. K.I. Inglis and her late husband, Mr. William Carmichael Inglis, against assessments of income tax in respect of the years ended 30 June 1974 and 30 June 1975. In substance, the objections seek the allowance of certain outgoings as deductions pursuant to the provisions of sec. 51(1) of the Income Tax Assessment Act 1936 and the allowance of depreciation on plant as a deduction under sec. 54 of that Act.
In 1950, the appellant and the late Mr. W.C. Inglis purchased in Tasmania a property which they subsequently named ``Lammermuir Estate''. An advertisement of the property at the time described it as consisting of 1405 acres of which 400 acres were suitable for cultivation, the balance being mainly open grazing country, the whole divided into seventeen paddocks and four runs having two miles of frontage to the River Derwent. The buildings consisted of a weatherboard home, a large barn, a wool shed, stables, an implement shed, a blacksmith's shop, a sheep dip and a drying and shelter shed. It was said that the stock carried on the property had developed into high-class Polwarth stock. Subsequent to purchase, 88 acres of the property were acquired by the Hydro Electricity Commission for the purpose of the construction of a lake and the property now
ATC 4006has a long frontage to Lake Meadowbank. The appellant and her husband entered into a partnership agreement to carry on in partnership on the property the business of pastoralists and graziers under the firm name ``Lammermuir Estate''. The partnership commenced to carry on a business of primary production. The following information is shown in copies of tax returns contained in the appeal book:
Year ended 30 June 1951
367 sheep purchased for 1,643 pounds
Stock on hand 367 sheep
Year ended 30 June 1952
667 sheep purchased for 1,00 pounds,
3 cattle for 45 pounds
405 sheep sold for 518 pounds
Losses by death 97
Stock on hand 667 sheep and 3 cattle
Sale of wool 1,207 pounds
Year ended 30 June 1953
No sales, no purchases
Stock on hand 742 sheep and 5 cattle
Sale of wool 963 pounds
Crops were not grown on the property save for the purpose of feeding the stock.
At some stage, the primary production activities were greatly reduced. In evidence, Mrs. Inglis said, ``Earlier on my husband did have in mind if finances permitted to have cattle and as the sheep market went to the pack in the end of 1953 he was even more convinced of this and during the sixties he had some animals, about thirty there at `Lammermuir'.'' In 1959, Mr. Inglis took up employment in Hobart though Mrs. Inglis' evidence was that, ``... his primary interest was always `Lammermuir'...''. In 1961, Mrs. Inglis also took employment in Hobart. During the 1960s Mr. and Mrs. Inglis became heavily involved in a dispute with the Commonwealth Trading Bank which held a security over the property. This dispute both took their time and attention and restricted their financial ability to stock the property. In the year ended 30 June 1965, 142 sheep were sold for 445 pounds, leaving 31 sheep on hand at a cost of 71 pounds. 157 pounds was received from the sale of wool. In 1967, Mrs. Inglis moved to Melbourne, ``... where I had to go so that we could continue against the bank...''. In the year ended 30 June 1968, 48 cattle were sold for $3,120. At the end of the year, the remaining stock, 16 sheep, were on hand at a cost of $64. In July 1968, Mr. Inglis joined Mrs. Inglis in Melbourne. In 1969, Mr. and Mrs. Inglis took up residence in Canberra. The vehicles on the property, a truck and a tractor, had been sold previously. Stock of Mr. and Mrs. Inglis ceased to run on the property during 1969. The learned trial Judge accepted that, from 1970 up until and including the relevant years of income, there was no stock of the partnership on the property and the partnership derived no income from the property. The income tax return for the year ended 30 June 1969 did not include a stock account or any income from stock. It showed that the light and power plant had not been used during the year and that the truck had been sold in December 1968.
On 2 August 1973, Mr. and Mrs. Inglis entered into a contract to sell 1,000 acres of the property to N.H.N. Management Pty. Ltd. for $200,000. Subsequently, the purchaser refused to proceed with the purchase and that transaction is presently the subject of an action for specific performance brought against N.H.N. Management Pty. Ltd. in the Supreme Court of New South Wales. On 19 April 1974, Mr. and Mrs. Inglis entered into a contract to sell the balance of the land, 317 acres, to a family company, Lammermuir Pty. Ltd., which they had formed. The sale was conditional on the completion of the sale to N.H.N. Management Pty. Ltd. Paragraph 25 of an affidavit of the appellant sworn 18 October 1976 said:
``25. The said William Carmichael Inglis and I excluded some 317 acres or thereabouts at Lammermuir, with a mile frontage or thereabouts at Lammermuir on Lake Meadowbank and the homestead, barn, wool shed, stables, implement shed, machine shed, sheep dip with drying and shelter shed and pine tree shelters at Lammermuir from the said sale of land at Lammermuir to NHN Management Pty. Ltd. and at all material times continued and intended to continue a business of primary production on the said 317 acres or thereabouts of Lammermuir either in the aforesaid partnership of Lammermuir Estate or in a family company Lammermuir Pty. Ltd. incorporated in the Australian Capital Territory.''
In the years with which we are concerned, therefore, the whole of the land was the subject of contracts of sale. Paragraph 25 of the appellant's affidavit to which I have referred indicates that it had not been determined whether Mr. and Mrs. Inglis or the family company would carry on primary production on the 317 acres. In her evidence to the learned trial Judge and in her address to this Court, the appellant said that the family company was the alter ego of herself and her husband and that if the company carried on the business of primary production the position would have been that she and her husband carried on the business through the company structure. The appellant laid emphasis upon the sale of the 317 acres to the company as indicating that she and her husband intended to retain the most valuable part of the property for their own purposes. However, the fact is that during the subject years of income the whole of the land was contracted to be sold to taxpayers other than Mr. and Mrs. Inglis, though neither contract was completed and one contract was conditional upon the completion of the other.
During 1975, Mr. and Mrs. Inglis unsuccessfully sought funds to enable them to purchase stock for ``Lammermuir'' and, early in January 1975, they attended a yearling sale at Randwick with a view possibly to purchasing a Wilkes yearling for the property. No acquisition was made. Later in the year, they again had in mind to make a purchase if there were suitable animals and if they could raise the funds to purchase bloodstock for the property. No purchase was made. After the subject years, some stock was again put on ``Lammermuir''. At the time of the trial, the property was carrying 19 cattle.
Over the intervening years there was, at times, stock on the property belonging to other persons, either with or without the permission of Mr. and Mrs. Inglis. I take this to be an irrelevant circumstance. Mrs. Inglis submitted that there was a derivation of income from the fact that a benefit was received when a neighbour, Mr. Bannister, who had some stock on the property, kept a supervisory eye on the property and perhaps repaired some fences. No such allegation as to the derivation of income was made to the learned trial Judge nor was any such income returned. In this appeal, the allegation should be ignored. Indeed, the evidence before the learned trial Judge was inconsistent with it. For example, para. 34 of the appellant's affidavit of 18 October 1976 said:
``34.... On this same visit William Carmichael Inglis told the said Edgar Bannister to clear his cattle and sheep off Lammermuir pastures and keep them off.''
Much of the discussion which took place before the learned trial Judge concerned the question whether or not a business of primary production was being carried on at ``Lammermuir'' in the subject years. His Honour concluded that a business was not being carried on. On appeal, Mrs. Inglis submitted that at all relevant times she and her husband carried on a business of primary production and the fact that there was not stock on the property in the subject years was not conclusive. Reference was made to
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 ; (1975) 132 C.L.R. 175 and to
Queensland Meat Export Co. Ltd. v. F.C. of T. (1939) 5 A.T.D. 176 . The appellant said that she and her husband had used the property for a business of primary production prior to the subject years, intended to restock the property thereafter and, in the subject years, did not carry stock on the property merely because of financial stringency and because their endeavours were directed to maintaining the capital asset of ``Lammermuir'' on which the stock had in the past run and was to be run in the future. For my own part, I think it could not be said that there was, in the subject years, a business of primary production being carried on with respect to ``Lammermuir''. The moving plant, the tractor and truck, had been sold in the late 1960s, no stock of Mr. and Mrs. Inglis had run on the property from 1969 or 1970 through to the relevant years of income, the whole of the land was the subject of two contracts of sale and it was uncertain when, in what manner and how much of the property would be restocked and whether it would be restocked by the company or by Mr. and Mrs. Inglis. The learned trial Judge concluded that no business was being carried on and, in my view, he was right.
The judgment under appeal proceeded upon the footing that that conclusion
ATC 4008resolved the allowance of the deductions sought. However, as I shall later point out in more detail, only the second limb of sec. 51(1) of the Income Tax Assessment Act specifies the carrying on of a business as an essential requisite to a deduction. Deductibility under the first limb of sec. 51(1) of the Income Tax Assessment Act depends upon the whole of the relationship between the subject outgoings and the gaining or producing of assessable income in the subject and other income periods. An examination of that relationship must be made. In this respect, one general observation may now be made. At the time when the relevant expenditure was incurred, not only was no business being carried on on ``Lammermuir'' but the property had potential for use in several ways. It was a property which could be developed or sub-divided. The Inglis family could use it for their own private pleasure. Stock could be grazed or crops grown on it and income earned. The contracts of sale could proceed and, in this event, the 317 acres could be stocked by the family company or by the taxpayers. Having considered the evidence, I think that it is an inescapable conclusion that, in the subject years, having regard to the uncertainties and possibilities of the future, the property was not then devoted by Mr. and Mrs. Inglis to the derivation of assessable income. It was then neither used to produce assessable income nor committed by Mr. and Mrs. Inglis to the production of assessable income.
The deductions sought for the 1973/74 year of income were for depreciation of plant and machinery and for outgoings, being travelling expenses and cost of printing and stationery. For the year ended 30 June 1975, the objection claimed a deduction of depreciation on plant and deductions for expenditure on rates, interest, travel, telephone, accommodation, Sydney Information Service, fees paid to lawyers and others and an amount paid to the Commonwealth Trading Bank. It is not necessary to detail all these expenses. Many of them were concerned with the litigation in which Mr. and Mrs. Inglis were involved with the Commonwealth Trading Bank and with N.H.N. Management Pty. Ltd. This involved travelling, accommodation, printing of appeal books, telephone calls and other expenditure of a like nature. Some of the expenditure was incurred in obtaining legal and other advice with respect to the steps to be taken in relation either to the Commonwealth Trading Bank or to N.H.N. Management Pty. Ltd. or with respect to attempts to obtain loan funds in order either to pay off existing commitments or to put the property on to a sounder financial footing. In addition, there were rates payable on the land and interest due on money secured on or borrowed in relation to the land. The evidence does not show that the moneys in respect of which the interest was incurred were borrowed for other than capital purposes. There were also travelling expenses in relation to trips when Mr. and Mrs. Inglis visited ``Lammermuir'' to see that it was in proper order and to undertake tasks of maintenance in the way of cleaning gutters and drains. In general, the relevant expenditure was incurred in the maintenance of the capital asset, the property, and in the protection of the interest which Mr. and Mrs. Inglis had therein and not in the operation of the property for income producing purposes.
At the hearing of this appeal, Mrs. Inglis put forward the contention that, if the objections were allowed, she and the estate of the late Mr. Inglis would also be entitled to a deduction of approximately $40,000 interest and to the benefit of averaging of income. However, these matters were not raised in the Notices of Objection and I give them no attention.
The deductibility of the subject expenditure is determined by sec. 51(1) of the Income Tax Assessment Act which reads:
``51. (1) [Losses and outgoings] All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
Two aspects of this provision must be considered in these appeals. First, the appellant must establish that the relevant expenditure was incurred in gaining or
ATC 4009producing the assessable income of each of the taxpayers or was necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Secondly, the appellant must establish that the expenditure was not of a capital, private or domestic nature.
On the first aspect,
JJ. said in
Lunney v. F.C. of T. (1957-58) 100 C.L.R. 478 at pp. 495-7 :
``The fact that sec. 51 was intended to deal with a great variety of items of expenditure made it inevitable that it should be couched in general terms and both that section and its immediate predecessor have been the subject of judicial consideration on a number of occasions. In terms, the section provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private, or domestic nature. The language is simple enough and, in the main, little difficulty is encountered in recognising those items of business expenditure which qualify as deductions. But in the nature of things it has been impossible to devise, as a substitute for the words of the section, a simple formula which will readily and precisely mark the limits of the operation of the section. Yet, in the course of dealing with individual cases, it has been necessary to devote particular attention to the words `in gaining or producing the assessable income' and `incurred in carrying on a business for the purpose of gaining or producing such income' and to attempt to express precisely what those words mean.
For the purpose of advancing the appellants' cases counsel, naturally enough, seized upon observations which have been used from time to time in attempts to elucidate the meaning of these expressions. In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as `incidental or relevant' to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section. For instance in dealing with the immediate predecessor of sec. 51 in
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 it was said: `The expression `in gaining or producing' has the force of `in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself' (1935) 54 C.L.R. at p. 309. In dealing with the same section in
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290 it was said that `it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income' (1937) 56 C.L.R. at p. 305. The same expression was again used in
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 when it became necessary to solve a problem arising under sec. 51. In that case it was said that `For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end' (1949) 78 C.L.R. at p. 56. This passage was repeated in
Charles Moore and Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344 at p. 350 . Examination of these cases, however, readily shows that the expression `incidental and relevant' was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief
ATC 4010passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (supra) the passage quoted above ((1949) 78 C.L.R. at p. 56) was immediately followed by the observation `The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income' (1949) 78 C.L.R. at pp. 56, 57. Thereafter, it was said: `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' (1949) 78 C.L.R. at p. 57. In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself.''
As much of the relevant expenditure had the attribute of expenditure directed to the maintenance or protection of a capital asset, assistance is gained also from the cases which have considered the circumstances in which expenditure such as rates and land tax may be deducted from assessable income. In the United Kingdom, the issue was considered in
Russell v. Town and Country Bank 13 App. Cas. 418 and
Smith v. Lion Brewery Co. Ltd. (1911) A.C. 150 . In Australia, the issue was considered first in
Moffatt v. Webb (1913) 16 C.L.R. 120 . The Court allowed the deduction. At p. 136, Isaacs J. said:
``The land tax is enacted by the legislature for its own purpose, that is, to tax the owner; and when he pays it to the Crown, he pays it as the owner, it is true, but so far, not for any purpose of his. He simply pays it because he is obliged to by law. But when he uses the property to produce an income, that is, for his business purposes, he pays the tax inseparably connected with the land also for his business purposes, namely, as an outlay necessary in the existing state of the law to obtain that income by means of that land.''
F.C. of T. v. Morgan (1961) 106 C.L.R. 517 , Dixon C.J., Kitto and Windeyer JJ. said, at p. 522:
``No one nowadays would deny that the rates levied on a rent-producing property form an outgoing to be regarded as made in producing or gaining the rents as income. If they are paid or actually borne by the taxpayer, does it matter by whom they are actually paid to the council or water authority? And why should it matter that they are borne by the taxpayer not because he paid them to the rating authority directly but because he reimbursed them, so far as they relate to his period of enjoyment of the rents, to a previous owner of the property? The correct view appears to be that the reimbursement is on account of revenue, not on account of capital, and is made in gaining the assessable income consisting of the rents.''
These decisions do not enunciate a test different from that adumbrated by Williams, Kitto and Taylor JJ. in Lunney's case. Rather they demonstrate circumstances in which outgoings incurred with respect to land may have the required character of outgoings incurred in gaining or producing assessable income.
Though the finding that Mr. and Mrs. Inglis were not carrying on a business in the subject years of income no doubt precludes reliance upon the second limb of sec. 51(1), this does not materially limit the appellant's claims. As was pointed out by
Rich, Dixon, McTiernan
Ronpibon Tin N.L. and Anor. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56 , the first limb has a very wide operation and covers almost all the ground occupied by the alternative.
On the second aspect of sec. 51(1), it is sufficient for me to note the classic statement of Sir Owen
on the nature of an outgoing or incoming of capital which appears in
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 at pp. 359-63 , and to note further that the operation of the exception as to outgoings of a private or domestic nature was considered in Lunney v. F.C. of T. (cited above),
F.C. of T. v. Hatchett 71 ATC 4184 ; (1971) 125 C.L.R. 494 and
F.C. of T. v. Faichney 72 ATC 4245 ; (1972) 129 C.L.R. 38 .
I have considered the subject expenditure in the light of these principles. Necessarily, a deduction is not established for the taxpayers by describing ``Lammermuir'' as a business asset (the appellant's description) and demonstrating that the expenditure was directed to the maintenance or protection of that asset. Much of the expenditure had the character of capital expenditure. And, having concluded that, in the subject years, ``Lammermuir'' was not applied or devoted to the derivation of assessable income, I find no basis upon which the conclusion should be drawn that any expenditure not of a capital nature had the character of expenditure incurred in the production of assessable income. Indeed, I have not been able to identify any of the relevant expenditure as expenditure having the character of expenditure having the character of expenditure which was incurred in gaining or producing assessable income. The nexus between the expenditure and the derivation of assessable income was too slight to confer upon the expenditure the requisite character. In so finding, I have taken into account whatever relationship I have been able to extract between the subject expenditure and the production of assessable income, whether that relationship referred to past years (e.g. in the case of interest paid under obligations entered into in past years), to the subject years, or to anticipated income periods. The relationship between the expenditure and the derivation of income in income periods other than the subject years of income was too tenuous to justify my examining, in these reasons, the effect of the judgments in Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 and in A.G.C. (Advances) Ltd. v. F.C. of T. (cited above). I have perused all the deductions sought pursuant to sec. 51(1). I am of the view that none of the expenditure was deductible under that section. I include expenditure on rates, interest, travelling, printing, stationery and telephone and fees paid to lawyers and others.
I need comment specifically on only one aspect of the claim. It was said that expenditure was incurred in seeking to purchase stock and to obtain finance for the purchase of stock. First, there was evidence that Mr. and Mrs. Inglis incurred expenditure in attending the yearling sales at Randwick in January 1975 with a view to purchasing a Wilkes filly. This evidence does not justify the allowance as a deduction under sec. 51(1) of any of the expenditure incurred in attending those sales. Mr. and Mrs. Inglis had not previously been involved in blood-stock and this venture should be considered in the same light as that of any other taxpayer who, not having commenced a blood-stock business, attends yearling sales with a view to making a purchase. Such attendance is too far removed from the gaining of assessable income to have the character of expenditure incurred in the course of gaining or producing assessable income. Secondly, expenditure was incurred in attempting to obtain finance. Paragraph 18 of Mrs. Inglis' affidavit of 18 October 1976 states:
``18. THAT on the 8th day of January, 1975, William Carmichael Inglis and I attended at the Commonwealth Trading Bank Head Office Sydney for the purpose of making application for a loan to stock Lammermuir with yearling beef, breeding cows and for funds to buy yearling filly Lot 434 by Pimento out of a Wilkes mare at the said yearling sale at Randwick.''
In her oral evidence, Mrs. Inglis gave evidence of approaches made to a Mr. Dean Wentworth, a financier and grazier in Sydney in 1974 and to the Commonwealth Trading Bank and to correspondence that there was with Mr. Palmer, solicitor. She said, ``... we were engaged in incurring expenses for the purpose of the property Lammermuir...''. In cross-examination, she was asked, ``I want to ask you now whether the moneys which you were attempting to raise from Mr. Wentworth and from the Bank and from any other sources were related to those cases or were they related to the property?'' The answer given by Mrs. Inglis was, ``They were all expressed to be related - and were - to pay out the Bank,... And it was to pay the Bank out and get money to develop Lammermuir that all these moneys were sought, and also that we sold the thousand acres''. This evidence does not justify the characterisation of any sum either as expenditure not of a capital nature or as expenditure incurred in gaining or producing assessable income.
Lastly, the appellant claimed a deduction under sec. 54(1). In order for depreciation to
ATC 4012be allowed it must be shown that the subject plant was used for the production of assessable income during the subject years or was installed ready for use and held in reserve in those years. For the reasons I have already mentioned, I am of the view that ``Lammermuir'' and, therefore, the plant were not devoted to the production of assessable income in the subject years and, therefore, that the deduction is not allowable under that part of sec. 54 which allows a deduction for plant used during the year for the purpose of producing assessable income. The plant was not plant held in reserve during years of income and, therefore depreciation is not allowable under the alternative provision of the section. Therefore, the claim for depreciation must fail.
For these reasons I am of the view that the appeal should be dismissed.
1. The appeal be dismissed.
2. The appellant pay to the respondent his costs of this appeal.