Federal Commissioner of Taxation v. Walker.

Ryan J

Supreme Court of Queensland

Judgment date: Judgment handed down 24 April 1985.

Ryan J.

This is an appeal by the Commissioner against a decision of Taxation Board of Review No. 3 which decided that the objection of the respondent to the assessments of the Deputy Commissioner of Taxation issued on 13 April 1981, 28 May 1982 and 27 June 1983 be upheld, and that the assessments should be reduced as follows:

  • (i) for the year ended 30 June 1980, by allowing a loss from primary production of $2,696;
  • (ii) for the year ended 30 June 1981, by allowing a loss from primary production of $462; and
  • (iii) for the year ended 30 June 1982, by allowing a loss from primary production of $446.

At the beginning of the hearing before me, an application was made on behalf of the Commissioner for leave to amend the notice of appeal. The effect of sec. 196A of the Income Tax Assessment Act (``the Act'') alas is that I am required to apply the High Court Rules to these proceedings, and by O. 65, r. 12(3) of these Rules, a notice of appeal from a decision of a Board may be amended by leave of the Court at the hearing upon such terms as the Court thinks fit. As it appeared to me that the amendments should be permitted to enable the real issues between the parties to the litigation to be determined and no disadvantage would be caused to the respondent by permitting them to be made instanter, I gave leave to amend.

A preliminary point was raised on behalf of the respondent that even as amended, the notice of appeal did not disclose that the decision of the Board involved a question of law. The notice specified various questions of law which were stated to be involved, but I consider it sufficient to refer to only one of these, namely that the Board erred in law in applying the wrong test to determine whether the taxpayer was carrying on a business of primary production. That seems to me clearly to involve a question of law. I refer to the remarks by Mason J. in
Hope v. The Council of the City of Bathurst 80 ATC 4386 at p. 4389; (1980) 144 C.L.R. 1 at p. 7:

``Many authorities can be found to sustain the proposition that the question whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law. One example is the judgment of Fullagar J. in
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 51, where his Honour quoted the comment of Lord Parker of Waddington in
Farmer v. Cotton's Trustees (1915) A.C. 922 at p. 932, which was adopted by Latham C.J. in
F.C. of T. v. Miller (1946) 73 C.L.R. 93 at p. 97, that where all the material facts are fully found, and the only question is whether the facts are such as to bring the case within the provisions properly construed of some statutory enactment, the question is one of law only. Fullagar J. then said (at p. 51):... `this seems to me to be the only reasonable view. The distinction between the two classes of question is, I think, greatly simplified, if we bear in mind the distinction, so clearly drawn by Wigmore, between the factum probandum (the ultimate fact in issue) and facta probantia (the facts adduced to prove or disprove that ultimate fact). The `facts' referred to by Lord Parker... are the facta probantia. Where the factum probandum involves a term used

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in a statute, the question whether the accepted facta probantia establish that factum probandum will generally - so far as I can see, always - be a question of law.'''

In the present case, the factum probandum is whether the respondent was carrying on a business in the sense of sec. 51(1) of the Act. The facta probantia are the facts accepted by the Board as establishing that factum probandum. The Board's decision that they did therefore, in my opinion, involved a question of law, and accordingly an appeal from that decision lies to this Court. It is not a case where the determination of the facts in issue led necessarily to a conclusion that a statutory criterion was satisfied.

Evidence was given by Mr Walker and by his friend Dr Corbett. I accept them both as truthful and reliable witnesses.

The respondent Walker is presently employed as a real estate salesman in Townsville. He used to live in Melbourne, but accepted a transfer by his former employer to North Queensland. He continues to maintain contacts with his family in Victoria and visits that State every year at Christmas time.

One of Mr Walker's acquaintances from his school days in Victoria was a veterinary surgeon, Dr Corbett, who was a consulting veterinary surgeon for a stud in the Dandenong Ranges which was breeding Angora goats. He was particularly interested in breeding goats by a process involving embryo transfer. His evidence was to the effect that the process involved the superovulation of a pure-bred female goat, the removal of embryos and their implantation into feral goats. It was usual to superovulate only once a year since the removal of the embryos entailed risks to the goat. That process was required by law to be performed by a veterinary surgeon. Apart from the embryo transfer procedure it was the practice to allow the goat to bear kids also in the normal manner.

The respondent stated that he discussed with Dr Corbett towards the end of 1979 the work in which he was engaged and the question of becoming involved in it. As a result of those discussions an arrangement was made for him to purchase a female Angora goat. It was left to Dr Corbett to select the goat which was purchased from the stud. Negotiation of the price was left to Dr Corbett but the respondent had discussed the prices of goats with him. The respondent stated that at that time the price of Angora goats ranged from $2,000 to $10,000 depending on the quality of the mohair. Dr Corbett agreed that this was the average price of goats at the time.

The respondent paid $3,000 for a goat named Mango Citrine which was two years old. Dr Corbett stated that this reflected the market price. His intention was to produce four progeny from that animal. Accordingly he paid $2,000 to the stud for service fees. Evidence was tendered which showed that $500 was the price of a service fee for high quality bucks. To pay for the goat and part of the service fee, the defendant borrowed $4,000 from the Townsville branch of the Commercial Bank of Australia Limited. This amount was repayable over forty-eight months and interest at 7.75 per cent per annum flat rate was charged.

The respondent had no land on which to run the goat. However, the process was one which required expert supervision and veterinarian services and the goat was accordingly left at the stud. No agistment or other fees were paid to the stud but it had the right to remove and sell the mohair.

In June 1980 three embryos were removed from Mango Citrine and placed in three feral goats. From this process one male kid named Treesbound Dion was born. Subsequently Mango Citrine gave birth also to a female kid named Geraldine. In July 1982 four embryos were removed from Geraldine and placed in two feral goats. This produced one male and one female kid.

Mango Citrine and Treesbound Dion died before 30 June 1981. The respondent had taken out a policy of insurance for the sum of $3,000 on the life of Mango Citrine on 26 May 1980 and he paid a premium of $182.10. In the year ended 30 June 1982 he received $2,920 from the insurance company in respect of the loss.

The respondent described his intention when he purchased Mango Citrine as being to go beyond one breeder. He said that when he purchased Mango Citrine he had projected his profit from Angora breeding for an initial four-year period on the basis of a sale of four offspring at $3,000 each and expenses amounting to $5,100. He had intended to continue with the project after the initial four years, and he said that if things had gone better

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he would have expanded. His evidence in this respect was supported by the testimony of Dr Corbett who stated that the respondent was interested in getting into the Angora industry and building up a small stud. The respondent said that in January 1984 he sold Geraldine and her offspring because the market was such that there was no sense in continuing to make losses. According to the evidence of Dr Corbett there was a serious decline in the price of Angora goats towards the end of 1982. The goat Geraldine and her two offspring were sold for $300 early in 1984. The decision to sell was made by the respondent.

The respondent joined the Angora Breed Society early in 1980. This organisation publishes a monthly journal which contains reports about prices and markets for Angora goats. It also operates a registration system for goats. The respondent said that he read the journal but he admitted that his decisions were made on the basis of what he was told by Dr Corbett and not by his reading of journals. The respondent described his role as being one of providing finance, keeping in touch with the market and receiving advice and giving instructions to Dr Corbett. He communicated frequently with Dr Corbett and visited the stud during his annual visits to Victoria. The respondent kept banking and accounting records of his involvement in the Angora breeding project. Dr Corbett made a personal reimbursement to the respondent of $500 in the 1982 year because as he said he felt that he had not achieved what he set out to do.

I am satisfied that in the income years ended 30 June 1980, 1981 and 1982 the respondent expended the amounts set out in his return by way of expenditure on primary production for the purposes stated in the returns and received in the year 1982 the income set out in the return for that year. The question is whether the amounts disallowed by the Commissioner but which were allowed by the Board of Review by way of loss from primary production were properly deductible.

It was argued for the Commissioner that it was necessary to look to the actual conduct of the respondent in the relevant period to determine whether he was carrying on a business of primary production and that sums expended would not be deductible if the conduct was preparatory to the carrying on of business in the future. I accept that this is correct. But as Fisher J. pointed out in
Ferguson v. F.C. of T. 79 ATC 4261 at p. 4269:

``A person may conduct a business, albeit of a limited nature, the activities of which business are preparatory to or in preparation for the conduct of another business on a larger scale. The question is whether the more limited activities at the earlier stage, standing alone, constitute a business.''

In answering that question consideration must be given to the matter set out in the judgment of Bowen C.J. and Franki J. in that case at p. 4264. I am satisfied that the respondent's activities had the purpose of profit making. In the years ended 30 June 1980 and 1981 he made a loss but this does not preclude me from accepting his evidence that his purpose was one of making profit. There was also repetition and regularity in his activities. These were directed to the breeding of high quality Angora goats by processes involving superovulation and also natural reproduction. For this purpose it was essential to have the breeding program carried out by an expert veterinarian. The activities of the taxpayer were limited but it was he who paid the fees for the breeding process, he paid for the goat which was used for breeding, he maintained communications with the expert and he tried to make himself informed about market conditions through membership of the Angora Breed Society and reading publications and it was he who made the decision to sell the goats. He organised his activities in a business-like way through the keeping of books of account at least until March 1981. There is nothing in the evidence to suggest that the taxpayer was merely pursuing a hobby. Rather it indicates that he was interested in the acquisition of an Angora goat for breeding purposes and thereby to make a profit. It is true that the volume of his operations was small though the amount of capital he ventured, namely $3,000, was not insignificant. However, it is established both by the remarks of Walsh J. in
Thomas v. F.C. of T. 72 ATC 4094 at p. 4100; (1972) 46 A.L.J.R. 397 at p. 401 and by the comments thereon by members of the High Court in
Hope v. The Council of the City of Bathurst 80 ATC 4386 at pp. 4390-4391; (1980) 144 C.L.R. 1 at pp. 3 and 10 that a person may carry on a business though he does so in a small way. I do not consider that the scale of his operations was such as to put in question the conclusion I have reached, namely that he was conducting his

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activities on a commercial basis. There is nothing in the arrangements which suggested that they lacked commercial reality.

I am satisfied that the respondent intended to carry on a program which involved the breeding of pure-bred Angora goats, the building up of a small herd and the sale of their progeny and that he did carry on that program until it became evident to him that in the market conditions that had developed he was unlikely to make any profit from it. It was submitted on behalf of the Commissioner that the taxpayer's situation was that of an investor who put money into a project operated by another and later took it out of the project. I think that the analogy with an investor is unsound. I do not consider it correct to assert that the role of the taxpayer was basically confined to keeping himself informed of the activities of the enterprise in which he had invested capital. The nature of the project and the respondent's location in Townsville, some 2,000 miles from the stud, made it inevitable that he would rely on the advice of an expert veterinarian in operating the breeding program. But the evidence satisfied me that the decisions in relation to taking part in the program and selling the progeny were made by the taxpayer. Dr Corbett was his agent to conduct the business though the circumstances were such that heavy reliance was necessarily placed upon his judgment and expertise in conducting the program. I consider for these reasons that the respondent was carrying on a business in the relevant years.

For the reasons given by the Court in Ferguson v. F.C. of T. 79 ATC at p. 4266 I consider that the outgoings which were held by the Board of Review to be deductible were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income within the meaning of sec. 51(1).

Accordingly I dismiss the appeals. The Commissioner will pay the respondent's costs of and incidental to the appeals to be taxed.

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