Federal Commissioner of Taxation v. Mullins.

Judges:
WB Campbell J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 24 March 1981.

W.B. Campbell J.

This is an appeal by the Commissioner of Taxation from the decision of a Taxation Board of Review. The Commissioner, relying upon sec. 26AAA(2) of the Income Tax Assessment Act 1936, assessed the respondent on the profit arising from the sale of property owned jointly by him and his wife and which they sold within 12 months from the date they purchased the property. The issue is whether the respondent can rely


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upon the provisions of sec. 26AAA(5) so as to exclude the operation of sec. 26AAA(2). The grounds of appeal are:

  • 1. That the respondent taxpayer's activities did not amount to the carrying on of a business.
  • 2. That the interpretation placed by the Board upon para. (a) of subsec. (5) of sec. 26AAA of the Income Tax Assessment Act is incorrect.
  • 3. That the interpretation placed by the Board upon para. (b) of subsec. (5) of sec. 26AAA of the said Act is incorrect.

The facts and history of this matter are as follows. The respondent was born in 1953 and lived with his family on a pig farm conducted by his father at Warwick. He married in 1975 and then went to live at Ipswich. His wife's family resided at Ipswich and since at the time of his marriage his mother-in-law was seriously ill, his wife wished to be with her mother during her illness. Both he and his wife obtained positions with the Ipswich City Council, the taxpayer being a plant operator. It appears that he had learned to operate tractors and machinery when he was on his father's farm. He commenced work with the Ipswich City Council on 3 February 1975 and he and his wife, on 14 August 1975, purchased about eight acres of land about five miles out of Ipswich, at Brassall. He bought this area of land with the intention of running pigs and growing small crops. He ploughed six acres of the land with the intention of planting it with oats. He did not like living in the city but preferred to be a farmer, and he also intended to build a house on the land at Brassall. He in fact planted oats with the intention of supplementing other feed for the pigs which he introduced to the small farm. He purchased a small second-hand tractor and his father gave him a pregnant sow.

The purchase price for the property was $6,500; at that time of purchase there was some fencing on it which had been badly damaged by the big floods in January 1974. When he purchased the property he estimated the value of the fencing on the basis of 40 chains at $5 a chain, namely $200. He did some repair work on the fence. He erected a small sty which consisted of a concrete slab of cement surrounded by weld mesh. The sow eventually gave birth to six pigs, four of which the respondent sold at the end of 1975 for $135. He then purchased another two young sows and the original sow produced a second litter, the respondent having taken this sow to his father's property to mate with a boar belonging to his father. The respondent was familiar with pig farming and I find that the pigs on the Brassall property were of good quality. The second litter of the original sow consisted of 13 piglets of which six died.

Whilst at the Brassall farm he purchased an irrigation pump and ancillary equipment with the intention of irrigating oats; he also intended to grow vegetables. He worked practically every afternoon on the farm for periods of an hour up to three hours after he had completed his work with the Council, and also did a lot of farm work at weekends.

His mother-in-law died about March 1976 and there ensued some disagreements in his wife's family. I find that at all material times his ultimate aim was to make his living as a pig farmer. After the death of his mother-in-law he and his wife decided to sell the Brassall property and acquire a larger farm. The land was sold on 7 May 1976 for $11,300. He and his wife then moved back to Warwick and about the end of July 1976 they purchased another and larger property up there, about 80 acres in area. He took his pigs from the Brassall farm up to his father's farm at Warwick and looked after them until he transferred them to his new farm. At the time of the sale of the Brassall farm he estimated that the fence was worth about $10 a chain, namely $400.

At Warwick he built his complement of pigs up to about 15 sows in 1978. However, he sold the Warwick farm in June 1980 some four years later. In 1978 his pigs at Warwick produced an annual income of about $5,400. The taxpayer and his wife had a small boy who became very ill and had to be medically treated at a hospital in the Brisbane area and this was one reason why he and his wife sold the Warwick farm and came to live in Brisbane. Unfortunately the little boy died. It appears that when the taxpayer and his wife were living on the Warwick farm he also worked for a large part of the time as a plant operator and performing casual work such as truck driving and farm work for various employers. His intention was to have about 25 sows on the Warwick farm and he


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genuinely considered that he could make a reasonable living out of 25 or 30 sows. It is significant that his father had no occupation other than the running of his pig farm, he had about 30 or so sows there and was able to bring up his family on a reasonable standard of living.

In the Commissioner's case a Mr. Preston gave evidence. This gentleman is presently employed as District Adviser in the Pig and Poultry Branch of the Department of Primary Industry. His evidence was to the effect that a viable pig farming operation required upwards of 50 sows and that in 1975 a 50 or 55 sow unit would have cost, for the erection of buildings alone, something like $30,000. He said that it would cost about $1,000 per sow to get a piggery on its financial feet; he did not think that 25 to 30 sows in 1975/76 would produce a living. On the other hand, he said that the average piggery in Queensland contained about 100 pigs with about 10 or 12 sows, and that it is not unusual to find a pig farmer doing other things. In the circumstances of this case I do not consider that Mr. Preston's evidence was of assistance in relation to my determination as to whether or not the respondent was, at the material time, engaged in the business or pursuit of pig farming.

Whether or not a particular business or an agricultural or pastoral pursuit is being carried on is a question of fact. In
Martin v. F.C. of T. (1952-53) 90 C.L.R. 470 Webb J. said at p. 474:

``The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.''

In
Thomas v. F.C. of T. 72 ATC 4094, Walsh J. said, at p. 4099: ``But a man may carry on a business although he does in a small way.'' In determining whether a person is engaged in carrying on a business it is ``relevant to ascertain if the operations of the taxpayer have a commercial purpose, i.e. pursuit of profit or gain rather than pleasure or recretation'';
Ferguson v. F.C. of T. 79 ATC 4261, per Fisher J., at p. 4270. In that case Fisher J. also said, at p. 4270:

``Moreover if the transactions which go to make up the activity or operations of the taxpayer have an element of regularity or repetitiveness this factor assists in concluding that the taxpayer is carrying on a business rather than indulging in a recreational or hobby activity.''

The fact that on the small farm at Brassall it may have been extremely difficult for the taxpayer ever to have made a profit does not seem to me to be decisive in the circumstances. The respondent was hoping to expand his piggery and, as he said, he had to crawl before he could walk. Nor, in the circumstances, does it seem to me that the fact that he intended to build a residence on the Brassall property supports the contention that he was engaged simply in a hobby of farming. I am of the view that it was not just an active hobby in which he was engaged but, as the subsequent purchase of the larger farm at Warwick illustrates, he was a man who wished to, and in fact did, even though in a small way in the financial year 1975/76, engage in the commercial activity of pig farming. I consider that when he and his wife had the farm at Brassall he took his first steps towards becoming a self-employed pig farmer. Another factor which is not to be disregarded is that the Commissioner in his assessment accepted that the respondent was carrying on the business of pig farming.

In the taxpayer's return for the relevant year he showed the following apportionment of price on the purchase of his farm: Unimproved value of land $6,300, fencing $200. He also disclosed that when the land was sold the apportionment was as to $10,900 for the unimproved value of the land and $400 for the fencing. As was pointed out by Dr. Beck in his reasons [Case L20,
79 ATC 101, at p. 102]:

``This arbitrary apportionment is a weakness in the taxpayer's case, but the Commissioner had accepted the amounts apportioned to fences and had already removed the `profit on fences' from assessability.''

The history of this dispute between the Commissioner and the respondent is set out by Dr. Beck [at p. 102]:

``The Commissioner at first assessed M on $2,400 or half the difference between total sale price and total purchase price


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i.e. $11,300 less $6,500. He overlooked or ignored a statement attached to the return showing a profit (described as `capital gain') of $4,047 after deducting legal and other expenses. Half of this accrued to M so the amount assessed should have been $2,024. Surprisingly, the taxpayer on objection did not point this out and merely reiterated a view already stated in the return on the application of sec. 26AAA(5) and referred to an amount of $2,400. In response to this objection the Commissioner allowed M his share (half) of the profit on the sale of the fences and asserted `sale of land is considered to be assessable income'. Although this is a misstatement, the intention was no doubt clear enough. Subsequently, after being asked to refer the matter to a Board, the Commissioner allowed a further amount to remove all but the net profit on the land based on the taxpayer's apportionment.''

The Board of Review directed that the amended assessment dated 7 April 1978 be further amended to reduce the assessable income by the respondent's share of the profit on the land, namely $1,924.

I accept the evidence of the respondent concerning his farming activities at Brassall and later at Warwick, and I am satisfied that at all material times, his activities amounted to the carrying on of the business or pursuits of pig farming. These activities were of a commercial nature, albeit those of a man starting off in a small way but having the intention to expand the business. Consequently, I hold that he was carrying on a business at Brassall and that the fencing was on land which was being used for the purposes of pastoral pursuits.

I shall now turn to grounds 2 and 3. Section 26AAA(2) provides that the assessable income of the taxpayer includes any profit arising from the sale of property or an interest in property before the expiration of 12 months from the date on which he purchased the property. Subsection (5) of that section provides that subsec. (2) does not apply if:

``(a) the property was included in the assets of a business carried on by the taxpayer and, as a result of the sale, an amount will be included in the assessable income of the taxpayer of the year of income under a provision of this Act other than this section;

(b) section 54 applied in relation to the property and, as a result of the sale, section 59 applies in relation to the property; or

(c)...''

Section 54(1) provides that depreciation of ``any property, being plant or articles'' owned and used by a taxpayer for the purpose of producing assessable income shall be an allowable deduction. Subsection (2)(b) of sec. 54 defines ``plant'' in sec. 54 to include ``fences, dams and other structural improvements on land which is used for the purposes of agricultural or pastoral pursuits''. I will set out the provisions of subsec. (1), (2) and (3) of sec. 59:

``(1) Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction.

(2) If that consideration exceeds that depreciated value, the excess, to the extent of the sum of the amounts allowed and allowable in assessments for income tax under this Act and any previous law of the Commonwealth in respect of depreciation, shall, subject to the succeeding provisions of this section, be included in his assessable income of that year.

...

(3) The consideration receivable in respect of the disposal, loss or destruction means -

  • (a) in the case of a sale of the property - the sale price less the expenses of the sale of the property;
  • (b) in the case of loss or destruction of the property - the amount or value received or receivable under a policy of insurance or otherwise in respect of the loss or destruction;
  • (c) in the case where the property is sold with other assets and no separate

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    value is allocated to the property - the amount determined by the Commissioner;
  • (d) in the case where property is disposed of otherwise than by sale - the value, if any, of the property at the date of disposal.''

Counsel for the Commissioner submitted that the word ``property'' in para. (a) and (b) of sec. 26AAA(5) should be construed so that, in circumstances such as the present where land with fixed improvements is sold, it should be held to apply to the improvements (the fixtures) so that they may be treated as ``property'' separately and apart from the ``property'' represented by the land itself. In short, it was submitted that the word ``property'' in sec. 59 ought to be regarded as, to use counsel's words, ``dissectable''.

I think it is important to have regard to the following factors. The long standing practice of the Commissioner has been, and still is, to treat sec. 59 as having application to depreciation on items or units of property which are fixtures on the land and which have no value independently of the land; his counsel has not argued that I should adopt the view of Taylor J. in
Ferling v. F.C. of T. (1966) 115 C.L.R. 603, at p. 631, namely, that ``there is... much to be said for the proposition that the provisions of sec. 59 have no application to a case such as the present''. Further, the Commissioner has accepted the respondent's apportionment of value as between the land and the fencing when the land was sold and has sought to apply sec. 59(2) to the situation; he has not assessed, nor does he seek to assess, the respondent merely on the ``profit'' on the fencing as apart from the ``profit'' on the sale of the land; in accordance with his long standing practice, he contends that sec. 26AAA(5)(b) should be construed so that the words ``the property'' therein apply to the fencing and not to the land so that, within the meaning of subsec. (5)(b), neither sec. 54 nor sec. 59 is applicable in relation to the relevant sale, which is the sale of the land. In his amended assessment he allowed, as has been said, the respondent a sum of $100 being his ``gain on fencing''.

In Ferling v. F.C. of T. (supra) some justices of the High Court expressed opinions by way of obiter dicta as to whether sec. 59 of the Act can be applied where there is a sale of land and improvements which are an inseparable part of the land.

In that case the taxpayer claimed to be entitled to a deduction under sec. 59(1) on certain depreciable items which were improvements on land within the definition of ``plant'' in sec. 54. His counsel argued that the improvements on the land were disposed of at the time he disposed of his interest in the land, that those items of property were sold with other assets but, because separate values were allocated to them in the agreement for sale, the Commissioner was not empowered to determine the values pursuant to sec. 59(3)(c). Because the difficulties in construing sec. 54 and 59 are referred to in the judgments I will set out certain passages from them. Taylor J. said, at pp. 630-631:

``With these observations in mind it is necessary to point out that what s. 59 deals with is `property' of the taxpayer, upon which depreciation has been allowed or allowable, which is disposed of, lost or destroyed, at any time during the year of income. This, of course, raises the initial difficulty in the way of the appellant for it is difficult to regard improvements upon land which, although they add to the value of the land, do not in themselves constitute property and have no value independently of the land itself. The next difficulty is that, in spite of the apportionment of the purchase money which each agreement purported to make, the purchase price specified in each agreement was the consideration receivable in respect of the land in the condition in which it stood at the time of each sale. No part of it was the consideration receivable for the improvements which could not be, and therefore were not, made, independently, the subject of a sale. In these circumstances there is, in my view, much to be said for the proposition that the provisions of s. 59 have no application to a case such as the present. I appreciate the difficulties which would flow from such a view but it is one to which, as at present advised, I would be prepared to subscribe since it seems to me to follow inevitably from the language of the section.''


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Owen J. said, at pp. 649-650:

``These contentions, if they be correct, certainly produce a surprising result but the answer to them is, in my opinion, to be found in the fact that the `property' of which the taxpayer disposed was his interest in Springvale and that interest was not, within the meaning of s. 59(1) or of s. 59AA, property in respect of which depreciation had been allowed or was allowable. It is unreal to say that the fencing, water improvements and buildings in respect of which depreciation had been allowed or was allowable were `property' sold with other assets or to attempt to distinguish between the land and the improvements which became an inseparable part of it. It would be just as unreal to say that the taxpayer had disposed of improvements such as `timber treatment' and `scrub pulling' at figures greatly in excess of the amounts shown against those items in the Rigby contract and had therefore made a substantial profit on the disposal of those improvements.''

A different view was expressed by Menzies J. when his Honour said, at p. 635:

``Nevertheless, it is inescapable that s. 59 does apply to some extent to `plant' which is in reality part of the taxpayer's land. For instance, if a house has been built for the accommodation of employees and, after some years of depreciation, that house is destroyed by fire and insurance moneys are paid, it could not be questioned that s. 59 would apply. The difficulty with which we are concerned arises because disposals are within the scope of s. 59 and, when land is disposed of, that disposal carries with it all that is part of the land. There is something unreal in treating what is simply part of the property as a whole as disposed of `with other assets'. The difficulty caused by the words `is disposed of' in s. 59 is perhaps mitigated to some extent by the provisions of s. 59, subs. (3), which provides for the ascertainment of `the consideration receivable in respect of the disposal, loss or destruction' of depreciated property. Thus, if an agricultural property on which there is a house which has been depreciated in accordance with s. 54 has been disposed of by sale, it seems to have been within the contemplation of those who framed s. 59 that the Commissioner could determine the value of the house for the purposes of s. 59 in circumstances where `no separate value is allocated' (see s. 59(3)(c)). It would, I think, be yielding too much to difficulties of a formal nature and having too little regard to the substance of the matter to treat s. 59 as inapplicable in the case where a property is disposed of which consists in part of `plant' upon which depreciation has been allowed in accordance with s. 54. I have, therefore, and against what I may say was my initial reaction, come to the conclusion that s. 59 does apply to cases such as the disposal of `Springvale'...''

Although Menzies J. was concerned primarily with the applicability of sec. 59(3)(c) and was of the view that, on the disposal of land with its improvements, sec. 59 could apply to the improvements treated as being separate from the land he also appears to have taken the view that depreciation on ``plant'' could be treated as depreciation on part of the property disposed of.

The principles to be followed in construing a taxing Act have been stated by Rowlatt J. in the following passage from his judgment in
Cape Brandy Syndicate v. I.R. Commrs. (1921) 1 K.B. 64 at p. 71:

``... one has to look merely at what it clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.''

I refer also to the following passage from the reasons for judgment of Barwick C.J. in
F.C. of T. v. Westraders Pty. Ltd. 80 ATC 4357, at p. 4358; (1980) 54 A.L.J.R. 460, at p. 461:

``It is for the Parliament to specify, and to do so, in my opinion, as far as language will permit, with unambiguous clarity, the circumstances which will attract an obligation on the part of the citizen to pay tax. The function of the Court is to interpret and apply the language in which the Parliament has specified those


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circumstances. The Court is to do so by determining the meaning of the words employed by the Parliament according to the intention of the Parliament which is discoverable from the language used by the Parliament. It is not for the Court to mould or to attempt to mould the language of the statute so as to produce some result which it might be thought the Parliament may have intended to achieve, though not expressed in the actual language employed.''

The terms of sec. 54(2)(b) are explicit and the fence is ``plant'' within sec. 54(1), so that depreciation on the fence was properly allowable as a deduction. Although sec. 54 allows depreciation on a fixed improvement as a deduction it does not itself refer to property other than in mentioning ``any property being plant or articles''; it does not refer separately to the ``property'' in the land itself as distinct from the ``property'' in the plant. However, I consider that sec. 54 can be said to apply in relation to the property of the respondent, since there was a sale by the taxpayer of his property and there was a sale of but one ``property''. Subsections (1) and (2) of sec. 59 provide that ``where any property... in respect of which depreciation has been allowed... is disposed of'' the loss or excess between the value of the property as depreciated and the consideration on disposal shall be deductible or assessable, as the case may be.

Putting to one side the relevant provisions of the Income Tax Assessment Act, it is a basic principle of the common law that when a parcel of land with its fixed improvements thereon is disposed of there is the disposition of only one property. The respondent's property was disposed of in the year of income; that property was the land and its improvements; depreciation had been allowed in respect of that property, namely, $7 as allowed by the Commissioner; and that property had a depreciated value, namely, the cost of the land to the taxpayer less the $7 allowable in respect of the property (as allowed by the Commissioner in respect of the fencing which is part of the property) in accordance with the definition of ``depreciated value'' in sec. 62(1). I appreciate that sec. 62(1) defines ``depreciated value'' with reference to ``any unit of property'' and that, in other provisions of Subdiv. A of Div. 3 of the Act, the expression ``unit of property'' not infrequently occurs. However, sec. 59 makes no mention of ``unit of property'' but speaks in general terms of ``any property... in respect of which the depreciation has been allowed''.

Consequently it seems to me that sec. 59 is applicable ``in relation to the property'' in accordance with those words as used in sec. 26AAA(5)(b). I am forced, therefore, to conclude that sec. 26AAA(2) does not apply in relation to the sale (the one and only sale) by the respondent of the property (the one and only property sold). In other words, having regard to the basic principle of the common law to which I have referred, I think that there was sold here but one property and that depreciation was allowed by the Commissioner, although in relation only to the fencing improvements, on that property. In my opinion the respondent has shown that subsec. (5)(b) applies to his case.

The Board of Review came to the conclusion that subsec. (5)(a) was applicable to the present facts, but the member of the Board (Dr. Beck) who gave reasons in support of this view, said that he construed subsec. (5)(b) so that it applied when the sec. 54 deduction related to the whole property. As I have said, I think that the terms of subsec. (5)(b) apply in relation to property any part of which has been depreciated by sec. 54, because of the wide terms of sec. 59 which refer to the disposal of ``any property... in respect of which depreciation... is allowable''.

I think there is substance in the view that, because sec. 26AAA(5)(b) explicitly relates to depreciable property, sec. 26AAA(5)(a) should be construed so as to refer to the non-depreciable assets of a business, such as trading stock. If sec. 54 and 59 are held to be applicable to a sale of property so as to bring in subsec. (5)(b), it could be said to be straining the language of subsec. (5)(a) to hold that it also applies because, as a result of the sale, the excess of consideration above the depreciated value means that ``an amount will be included in the assessable income'' under another provision of the Act. However, I leave this point open and do not express disagreement with the Board of Review.


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I do not think that sec. 59(3)(c) is of assistance in the present circumstances. That section provides that the consideration receivable in respect of the disposal in the case where the property is sold with other assets and no separate value is allocated to the property, is the amount determined by the Commissioner. It cannot be said here that the fence was sold with other assets; there was one property sold and but one ``asset'' sold. If the Legislature intended to make subsec. (3)(c) applicable to the sale of the property being ``plant'', as defined by sec. 54(2)(b), which are fixtures on and form part of the property sold, so as to treat the sale of such fixtures as a sale of property separate and apart from the sale of the land of which they formed an integral and inseparable part, it could very easily have said so.

For the above reasons I am of the opinion that the appeal should be dismissed.


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