Case Q116
Judges: Before MKP Brady Ch
JE Stewart M
DJ Trowse M
Court:
No. 2 Board of Review
K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)
The taxpayer, in preparing his return for the year of income ended 30th June 1980, claimed a loss of $19,148 in carrying on an alleged business of breeding horses. Additionally, he claimed an investment allowance of $240 for the purchase of a new mower. Those claims for the greater part were disallowed by the Commissioner, and the matter has now come before this Board for review.
2. In the return of income in issue, the taxpayer described himself as a horse breeder and master mariner, and his salary from the latter occupation (which covered the full
ATC 603
year) was included as assessable income. It seems that the taxpayer first went to sea in 1952, and has been at sea on and off since then. As a merchant seaman he worked a cycle of five weeks on and five weeks off. Accordingly, he was away at sea for six months in any twelve months period.3. He told us that he held a lifetime interest in horses. He had lived his boyhood life on a farm in Scotland and had competed in junior horse-riding events. Subsequently, as a young man of 20, he spent some 18 months in Texas breaking-in and training horses. He then spent some four years in England training horses as a part-time interest and riding them in hunting and eventing-type exhibitions. He came out to Australia to live in 1967 when he was 29 years of age. It seems that he worked as a seaman on the Australia/New Zealand run and, when ashore, lived with his parents and assisted his sister in training eventing-type horses and show-jumpers. He married in the following year. It appears that his wife was an instructress in a riding school and had a few horses of her own.
4. In March 1973 the taxpayer and his wife purchased a property of 41.46 hectares, or approximately 104 acres, some 65 kilometres from the capital city of T for the purpose of breeding eventing-type horses and show-jumpers. The price paid for the property was $23,912. Part of the plan in conducting the operation was for the taxpayer to cease work as a merchant seaman within five years of going on the property. However, due to a number of adverse factors which we shall later relate, that intention was not realised; indeed, we were told that the taxpayer is still working in his seafaring occupation.
5. In giving his evidence, the taxpayer pointed to a number of features which made the property an attractive horse-breeding proposition. First, it had a river on one boundary which provided water for irrigating pastures except in abnormally dry seasons, secondly, the land was good grazing country and thirdly, there were a number of buildings on the property which could be adapted for his particular use. Over the years 1973 to 1980 he informed us that he converted an old shed used originally as draught-horse stables to a modern stable complex, he constructed a training and dressage area, he built a considerable amount of new fencing and repaired existing fencing, and increased the property's irrigation capacity. Additionally, in conjunction with a neighbour, he purchased haymaking equipment, a bailer, a mower and a plough, and a superphosphate-spreader, drill sower, a tractor and a four-wheel drive vehicle on his own account. The depreciation schedule which formed part of his 1980 tax return showed that the written-down values of his fixed assets, comprising some 30 individual plant items, totalled $25,380 as at the beginning of that year. In regard to pasturing, he advised that at one time or another he had sown oats, barley, peas and lucerne for the making of hay, and had 22 acres, or 20% of his total holding, under pasture. He advised us that he only accomplished the above tasks by working on the property full time on a seven day a week basis for the periods that he spent ashore.
6. At the time of purchasing the property, the taxpayer owned a thoroughbred mare and a filly foal. His wife owned two pony mares. They were to comprise the stud's foundation stock together with a further mare purchased soon after they went into possession. Initially the taxpayer did not have his own stallions, but covered costs of service by outside stallions by agisting other horses belonging to the stallions' owners. At some time during the calendar year 1979, it appears that he had up to a maximum of 57 horses on his property. In the year of income in issue he acquired a stallion (a pure-bred Arab) and leased two other stallions, and so achieved a measure of independence as regards that aspect of his breeding activities. He then leased brood mares to mate with his stallions and proceeded to breed a particular type of horse using thoroughbred mares put to his Arab stallion. That particular form of breeding, whilst commonplace in Europe, was conceded by the taxpayer to be novel in Australia. However, he considered that those breeding lines would produce a horse eminently suitable for eventing as it would possess the heart capacity of the thoroughbred coupled with the endurance of the Arab, both qualities apparently being most highly desirable.
7. The taxpayer informed us that his stock of horses has increased each year since he went on the property, and that is reflected in the following livestock schedule:
8. Losses were made by the taxpayer in all of the above years. We were told that the losses were all allowed as deductions by the Commissioner in all of the years save that ended 30th June 1980 where that loss is the subject of this present hearing. In that year there were no sales (as indicated above), and with the stock at the end of the year valued at cost, no gross profit was seen to be earned. Operating costs and overhead expenditures, however, were to the order of $21,481, and with agistment and sundry income amounting to only $2,073, a considerable loss was incurred on the year's operations. We were told that further losses were incurred in the years ended 30th June 1981 and 1982. Losses are expected to continue until 1985/86, when operating costs are expected to be covered by sales revenue. A small profit is then expected in the following year, and presumably the further expectation is that profits will be made in succeeding years.
9. In the light of the above information, can it be said that the taxpayer was conducting a business in the year in issue? The question in the broad sense has been judicially stated to be one of fact. In
Martin v. F.C. of T. (1952) 10 A.T.D. 37 at p. 39; (1952-1953) 90 C.L.R. 470 at p. 474 it was said:
``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.''
10. We consider that the nature of the taxpayer's activities is particularly relevant where, as in the instant case, the activities themselves tend to involve a deferment of earnings. At first glance, the taxpayer's activity of breeding horses could appear to lack ``a commercial flavour'' (see
Ferguson v. F.C. of T. 79 ATC 4261 at p. 4271), but closer examination tends to reveal that the lack of profit is due to the nature of the activity itself rather than to any lack of ``significant commercial purpose or character'' (see
Thomas v. F.C. of T. 72 ATC 4094 at p. 4099, also
Mclnnes v. F.C. of T. 77 ATC 4167 at p. 4169). The lag in receipt of income in the taxpayer's own situation is all the more pronounced because he had to obtain acceptance by potential buyers of his end product stemming from the fact that it was different to what the market was used to. Additionally, this involved time and money expended on sales promotion which might, or might not, produce benefits in the long term but were unlikely to produce immediate benefits.
11. An expert witness, a land valuer with a wide knowledge of animal husbandry who gave evidence for the Commissioner, stated that there was no market for the progeny that the taxpayer was breeding, and advised us that the demand was only for thoroughbreds. Because of that witness's expertise, his opinion carries considerable evidentiary weight. However, we do not consider that his conclusion of itself, even if correct, precludes us finding that the taxpayer was conducting a business. In the recent case of
Walker v. F.C. of T. 83 ATC 4168, currently on appeal to the Federal Court, Lusher J. referred to a
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trading situation akin to that of the taxpayer when he said at p. 4181:``Much of business activity, particularly in a new field, has a degree of uncertainty and risk depending on many factors and elements that give an atmosphere sometimes of a gamble to it but nevertheless the reality is that a business is being carried on.''
12. Criteria relevant to determining whether a taxpayer is carrying on a business were outlined in the joint judgment of Bowen C.J. and Franki J. in Ferguson (supra) at pp. 4264-4265 in the following terms:
``There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial.''
13. The matter of ``carrying on a business'' was closely examined by the High Court in
Hope v. The Council of the City of Bathurst 80 ATC 4386. The case was concerned with whether an owner of a property using it to take stock agistment was carrying on a business on that land so that it would be rated at the lower general rate applicable to rural land. In giving the principal judgment that the property owner's activities amounted to a business, Mason J. stated his reasons at p. 4390 as follows:
``Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit. The activity had a permanent character in that it had been carried on without interruption since 1965. The appellant sought customers by advertising and kept appropriate financial records. The land, though small in area, was put to its best potential use and the pastures were improved and facilities including fences were provided for that use. There is nothing in the findings to suggest that the activities were other than genuine and real.''
14. All of the above indicia apply equally truly in the instant case. They reinforce the general impression we gained from all the evidence adduced before us that the taxpayer was carrying on a business. However, we consider that the evidence also points to the fact that the taxpayer carried on the business jointly with his wife. They purchased the property in their joint names and, whilst the main operating bank account was in the taxpayer's own name, funds were regularly transferred to it from an account opened up in their joint names. The evidence was not clear as to how the operation was conducted during the taxpayer's repetitive absences at sea (and within that context we were puzzled as to why his wife was not called as a witness either by the taxpayer or by the Commissioner), but having in mind that the wife was experienced with horses, and secondly the passing references made in the transcript to the duties performed by her (see p. 59), we consider that the conclusion is inescapable that she was the main operative on the property while her husband was away. We therefore view the taxpayer and his wife as being ``in receipt of income jointly'' (see definition of ``partnership'' in sec. 6(1)).
15. We feel that we should allude to a further matter before concluding. In putting forward his various submissions, the taxpayer's representative argued in the alternative that his client's expenditures came
ATC 606
within the first limb of sec. 51(1), and so contended that they were properly deductible to the extent to which they were incurred in gaining his income. Because of the view that we take that there was in fact a business being carried on by the taxpayer and his wife, it is not necessary for us to deal with that submission. We content ourselves with observing that in order that the alternative claim might succeed, more evidence would be required to be adduced in order to show the necessary nexus between the expenditures and the income of the year in issue and perhaps of subsequent years.16. Before proceeding to- make the necessary order, it is necessary in the interests of clarity to reaffirm the amounts in dispute. The loss of $19,148 incurred in the year in issue comprised expenditures of $21,481 less income stated to be $2,333. That latter figure comprised ``Agistment and Sundry Income $2,073'' and ``Private use of motor vehicle $260''. For present purposes, it is convenient to treat the latter item as a deduction from the motor vehicle expense item. On that basis the total expenditure figure is reduced to $21,221. When considering the objection the Commissioner issued an amended assessment to allow two of the expenditure items, viz: tax agent's fees $198, and a donation of $5. Thus the total of the expenditures in dispute is consequentially reduced to $21,018.
17. A word or two, also, should be said about the investment allowance claim. The subject matter of the claim was a new mower purchased for cutting hay, and was so used by the taxpayer in the year of income in issue. It was purchased for $2,400 conjointly with a neighbour, and the taxpayer advised us that he claimed a depreciation deduction on one-half of that value, i.e. $1,200. It seems to us that plant items so purchased are not precluded from the investment allowance deduction so long as the joint owners use them solely in the course of their respective income-producing activities. Accordingly on the fact situation that then existed, the taxpayer correctly claimed a deduction of $240, i.e. 20% of $1,200. However, because we consider that the taxpayer was in receipt of income jointly with his wife, we see the business as being conducted as a partnership for purposes of the Income Tax Assessment Act. Therefore, the taxpayer is entitled to a deduction of one-half only of his investment allowance claim.
18. In the result, we would direct that the taxpayer's assessment be amended (i) to allow an amount of $10,509 by way of deduction, being one-half of the adjusted total expenditure figure, and (ii) to include an amount of $1,036 as assessable income, being one-half of the business's agistment and sundry income. We would also direct that an investment allowance claim of $120 be allowed.
Claim allowed in part
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