DAFF v FC of TJudges:
BH Pascoe SM
Administrative Appeals Tribunal
BH Pascoe (Senior Member): This is an application to review decisions of the respondent to disallow objections lodged against notices of amended assessment of income tax in respect of the years ended 30 June 1992, 1993 and 1994, and a notice of assessment in respect of the year ended 30 June 1995. The applicant had objected to the disallowance of deductions claimed for losses incurred in carrying on a business of primary production in each of those years. The objections were disallowed as the respondent took the view that the activities of the applicant in those years did not amount to the carrying on of a business of primary production.
2. At the hearing the applicant, Mr Daff, was represented by Mr Powrie, a barrister and solicitor, and the respondent by two officers of the respondent. Evidence was given by Mr Daff. A statement from a Mr Carey, a farm manager and consultant, was tendered in evidence for the applicant. Although Mr Carey was in attendance in the early stage of the hearing, he became unavailable to give oral evidence or for cross-examination because of a report of a bush fire at or near his property. The respondent did not object to his statement being taken into evidence.
3. Some three or four days prior to the hearing, the respondent advised the applicant and the Tribunal that it was the respondent's intention to argue that if a business was conducted by Mr Daff on the subject property, it was conducted by him on behalf of the Daff Family Trust, not on his own account. Attached to the letter of advice were extracts from a title search which showed that the subject property had been purchased in the name of Sandra Ann McIntyre as trustee for the Daff Family Trust. Further transfers appear to have been lodged in August 1995 after the conclusion of the years of income with which this dispute is concerned. At
ATC 2131the hearing the respondent sought to have the basis of property ownership and occupancy dealt with as a preliminary point. Mr Powrie objected to dealing with the matter in this way on the grounds that it was a very late notification of the respondent's intention and a full response required further research. The Tribunal ruled that it was not appropriate to deal with this separate question as a preliminary point. The primary issue was whether the applicant was carrying on a business of primary production on the subject land. The facts surrounding the activities carried on, the ownership of the property and the relationship between that owner and Mr Daff should be known to Mr Daff and were properly a matter for evidence by him. If in the view of the Tribunal or the parties after hearing the evidence the matter of ownership and the relationship required further evidence or submissions, that could be dealt with by adjournment or subsequent written submissions.
4. Mr Daff gave evidence that he had been involved in farming since 1966 in Wagga, mainly involving fat lambs and pigs. He said that he completed courses relating to mixed farming activities at Wagga Agricultural College in 1968 and 1969. In 1981 he acquired a property near Boorowa, NSW, where he raised fat lambs, horses and cattle, and commenced breeding harness racers. Subsequently, he commenced horse breeding activities in partnership on a property ``Amberley'' in Queensland. After a dispute with his partner, receivers were appointed in 1987. This venture had commenced after Mr Daff retired from the Australian Federal Police in 1986 due to work-related stress and a motor vehicle accident. Since then he has been in receipt of a pension from the Retirement Benefits Office and Comcare.
5. Mr Daff said that he purchased 52 acres some 21 km from the city of Canberra in October 1991. The property had been part of a former sheep station and the former shearing shed paddock. On the property was the shearing shed, some other smaller sheds and the original shearers' cookhouse, which had been converted to a two-bedroom residence. He said that his intention had been to renovate and live in the house. However, initially, his father, who was 86, was ill and Mr Daff said that he was required to live in town and care for his father. The house was rented to the vendors for some 10 weeks and then to another man for some three weeks. Mr Daff said that he then commenced to make renovations to the house for his own future use. He maintained that he worked at the property every day after taking possession.
6. Mr Daff said that during the relevant years he re-fenced some 60% of the perimeter, installed subdivisional fencing, installed irrigation, ploughed the land, renovated the shearing shed, and sowed new pasture. He said that horses had been a way of life and business for him since 1972 and he had bred, raced, driven and trained harness racers. His activities in this area ceased in May 1992 as a result of a motor vehicle accident, and only recently has he been able to breed and train the horses. Mr Daff said that a factor in purchasing the particular property was its suitability for horse breeding. He said that, at the time he had 13 mares, but, after the 1992 accident, could not handle the stallion. He maintained that an initial plan was to use 30 acres to plant pine trees for sale as Christmas trees. His intention was to plant 7 acres each year with each area producing trees to a suitable height for sale after four years, so that, at the end of the first four years, he would have an annual crop. Mr Daff said that this plan did not materialise because of the soil salinity which he tested himself. He said that, initially, he intended to use the balance of the property for poultry, horses and breeding harness racers. After recognising that the pine tree project was not viable, Mr Daff said that he commenced a program of breeding calves for sale at three to four weeks old. He maintained that, commencing in 1994, he looked at several properties with the view of purchasing some 200 acres for calf production. However, he said that the market collapsed and it was not possible to derive an adequate income from that activity. He was of the view that drought conditions over the past 10 years have seriously limited farming production. During the year ended 30 June 1994, Mr Daff purchased 48 goats. He said that these were purchased when the market was at its peak, 11 goats were killed by foxes and, after shearing, he sold the remainder.
7. During the year ended 30 June 1992, Mr Daff purchased a tractor for $3,500 and expended a further $13,327 on farm equipment, stables, fencing and irrigation equipment. In the next three years he expended $7,957, $3,238
ATC 2132and $24,425 respectively on depreciable assets. His evidence relating to pasture improvement, control of red legged earth mite, the condition of the property, etc., demonstrated an understanding of agricultural pursuits. Tendered in evidence was what Mr Daff called a diary commenced in 1981 in which he recorded on a monthly basis his expenditure and livestock transactions and a stud book which commenced in March 1994 when he embarked on the purchase of Poll Hereford stud cattle. Mr Daff maintained that his books and records were inspected by officers of the respondent as part of the audit in 1996 and he was told that there was no need to change or improve his record- keeping. The relevant number of livestock in the years in dispute were:
1992 1993 1994 1995 Horses Purchased 8 8 8 16 Sold 3 10 16 18 Stock at year end 14 12 4 2 Cattle Purchased -- 8 21 25 Sold -- 8 1 40 Stock at year end -- -- 17 8 Goats Purchased -- -- 48 -- Sold -- -- -- 25 Stock at year end -- -- 41 --
8. In relation to the ownership of the property, Mr Daff said that he had purchased properties in the name of a family trust since 1981 on the advice of his accountant and solicitor. He said that this was to ensure a benefit for his children. He said that Ms McIntyre was not his de facto spouse, but may become his wife. She had replaced his father as trustee of the family trust. Mr Daff accepted that he did not understand the legal position of the trust and believed that it did not exist any more. He stated that part of the reason for the property being in the name of Ms McIntyre was that she had provided funds for the building of a new house on the property and wanted legal ownership as surety for the money. From other evidence it would appear that this comment related to the further transfers in 1995 after the period with which the Tribunal is concerned. Mr Daff said that the original purchase was financed by a loan from the bank described as a housing loan plus personal funds.
9. The statement of Mr Carey commented on the quality of the machinery, pasture, stock, fencing and irrigation on the property. He expressed the opinion that the quality of the improvements indicated that Mr Daff was knowledgeable in farming matters and that the farm was ``more like a business than a hobby''. Mr Daff said that he had known Mr Carey for some two to three years by sight, but that he was not a close friend. He understood that Mr Carey first visited his farm some four months prior to the hearing. Mr Carey's statement is dated 12 March 1998, the day before the hearing, and has limited value in relation to Mr Daff's activities of some three to six years prior.
10. It is appropriate to consider firstly whether or not a business of primary production was carried on in the relevant years. Only if there was does the question of who carried on the business need to be considered. It was submitted for the applicant that at all times during the relevant period he carried on activities that fell within the ambit of the definition of primary production in the Income Tax Assessment Act 1936 (``the Act''), and the totality of these activities, coupled with his personal skills, should lead to the conclusion that the activities were correctly characterised as a business of primary production. It was said that Mr Daff had given evidence of farming knowledge, training and experience and the equipment and improvements to the property were well beyond that of a hobby farm. Mr Powrie submitted that the original intention of Mr Daff in acquiring the property was the operation of a harness racing, horse breeding and training business with the planting of pine trees for sale as Christmas trees to provide a regular source of revenue after the first four
ATC 2133years. The first of these was unable to be pursued to its intended extent as a result of the motor vehicle accident seven months after purchase of the property, and the second was not pursued because of the previously unknown degree of salinity. It was argued that Mr Daff was committed to activities on the property which were expected to yield a profit and those activities varied as a result of market changes, drought conditions and physical abilities. Mr Powrie relied on decisions such as
Thomas v FC of T 72 ATC 4094;
Ferguson v FC of T 79 ATC 4261;
FC of T v Walker 85 ATC 4179; and
FC of T v Osborne 90 ATC 4889.
11. For the respondent it was submitted that the activities in which Mr Daff was involved on the property did not amount to the carrying on of a business. Alternatively, it was submitted that any allowance for deductions claimed should be limited to the amount of assessable income derived from these activities in each year of income. Here the respondent relied on the decision in
Ure v FC of T 81 ATC 4100. It was clear that, in part, the respondent's view was influenced by the fact that, in every year since 1981, the applicant had incurred losses from primary production activities. In relation to this subject property, the respondent argued that Mr Daff had neither a genuine belief nor the possibility of generating a profit from his activities. Reference was made to a letter tendered at the hearing from Mr Daff's accountant to the bank in May 1991, which stated that the property proposed to be purchased would provide an annual income of $5,000 from livestock agistment and $2,000-$5,000 from shearing contracting. It was said that this letter made no reference to any intention to carry on any primary production business. The respondent pointed to a history of Mr Daff making very small gross profits on the sales of each animal and his failure to demonstrate an intention or an ability to achieve a level of sales that could produce a profit. It was argued that the applicant was simply engaged in an expensive hobby or pastime as a lifestyle choice. In the alternative, it was submitted that the large imbalance between income and expenditure, the existence of a house said to be worth $50,000 on the property which was rented for 13 weeks only, and the applicant's stated desire to live in the country leads to the view that there was a significant private and domestic element of expenditure. As such, an appropriate basis of assessment was to apportion the expenditure allowing deductions for an income equal to assessable income only.
12. The primary production losses claimed and disallowed, and the assessable income from activities on the property, amounted to:
Loss Assessable income Year ended 30 June 1992 $26,373 $4,293 Year ended 30 June 1993 $39,829 $2,793 Year ended 30 June 1994 $29,006 $1,521 Year ended 30 June 1995 $36,752 $1,548
The assessable income consisted of gross profit on livestock, shearing shed hire, house rental and agistment fees. Major items of expenditure included in the losses claimed related to depreciation, fodder, motor vehicle expenses, service fees and interest.
13. As always in cases such as these, the question of whether a business was being carried on in a particular year depends upon the facts of each case. The principal factors which need to be considered in deciding such a question were succinctly set out in a decision of Deputy President McMahon of this Tribunal, reported as Case W122,
89 ATC 967 where he said (at page 970):
``16. There have been many cases decided on the question of what constitutes the carriage of a business. The facts in each case, of course, will need to be looked at individually. However, there are four principal factors that may be used as guides in reaching an appropriate decision. They are, firstly, the scale of operations, secondly, the elements of repetition and system, thirdly, whether a significant commercial purpose exists or whether the activity
ATC 2134represents a hobby and, fourthly, whether there is a profit purpose.
17. It is true that a large scale operation lends itself more easily to an objective inference of a commercial undertaking. None the less, Walsh J. said in
Thomas v. F.C. of T. 72 ATC 4094 at p. 4099 `a man may carry on a business although he does so in a small way'. In
Ferguson v. F.C. of T. 79 ATC 4261 at p. 4269 Fisher J. said:
`Finally, the conclusion is open to be drawn that a taxpayer is engaged in business activities notwithstanding the fact that he is operating in a very small way i.e. on a few acres, with very few trees or with a very small number of stock. I would be of opinion that the size of the operation could be of significance for the purpose of testing whether a taxpayer is conducting a hobby rather than a business, but that size is certainly not the determining factor.'
18. The second factor to be considered is the presence or absence of elements of repetition and system or of some form of organisation. These were found to exist, for example, in
F.C. of T. v. Mullins 81 ATC 4192. In Ferguson, Fisher J. 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.'
19. The third factor to be considered is the presence or absence of a significant commercial purpose. This is a phrase that appears to owe its origin to the observations of Walsh J. in Thomas at p. 4099. It has been relied upon in many subsequent decisions.
20. The fourth factor, namely the presence or absence of a profit purpose, was referred to in Ferguson at p. 4270:
`it is certainly relevant to ascertain if the operations of the taxpayer have a commercial purpose, i.e. pursuit of profit or gain rather than pleasure or recreation.'
Evans v FC of T 89 ATC 4540, Hill J said (at pages 4554 and 4555):
``The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation.
There is no one factor that is decisive of whether a particular activity constitutes a business. As Jessel M.R. said in the famous dictum in
Ericksen v. Last (1881) 8 Q.B. 414 at p. 416:
`There is not, I think, any principle of law which lays down what carrying on trade is. There are a multitude of things which together make up the carrying on of trade.'
Profit motive (but see cf.
I.R. Commrs v. Incorporated Council of Law Reporting (1888) 22 Q.B. 279), scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on (
I.R. Commrs v. Livingston (1927) 11 T.C. 538), repetition and a permanent character, continuity (
Hope v. Bathurst City Council 80 ATC 4386 at p. 4390; (1980) 144 C.L.R. 1 at p. 9;
Ferguson v. F.C. of T. 79 ATC 4261 at p. 4264), and system (
Newton v. Pyke (1908) 25 T.L.R. 127) are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.''
Ferguson v FC of T 79 ATC 4261, Bowen CJ and Franki J, in a joint judgment, commented on the elements to be considered (at pages 4264 and 4265):
``... 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
ATC 2135business. 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.''
Tweddle v FC of T (1942) 7 ATD 186, Williams J in allowing the taxpayer's appeal observed that it was not a function of the Act to dictate the manner in which a taxpayer was to run his business or the type of business the taxpayer was to undertake. In that case, his Honour accepted that the taxpayer had a genuine belief that the business would generate profits.
14. In this case, Mr Daff has had a long involvement in farming. Whilst he has been unsuccessful over some 14 years in making a profit, this does not mean that he has not been carrying on a business. In the respondent's statement of reasons for the decision provided pursuant to s. 47 of the Administrative Appeals Tribunal Act 1975, reference is made that Mr Daff ``has been retired since 1986''. The evidence of Mr Daff and his age of 55 did not indicate to me that he has ``retired''. He stated that he worked at the property every day and he would not have purchased a farm unless prepared to work 14 hours a day when required. He maintained that when the mortgage was paid off and no further capital expenditure was required, he expected the farm to be profitable. He stated that his aim was to make money and when that day comes to ``put my feet up and enjoy it''. The scale of activity was clearly small during the relevant years. This was explained by Mr Daff as being the result of his accident, drought, market and the fact that, having been a former shearing shed paddock, the land was hard packed and had not been worked for years, requiring ploughing, seeding and reintroduction of nitrogen. Considering all of the evidence and accepting that Mr Daff is experienced and competent in farming, is genuine in his belief that the property will generate profits even though he has not succeeded in doing so to date, and has devoted much of his efforts towards developing and operating the property to that end, I am prepared to accept and to find that he was carrying on a business of primary production during the years in question.
15. Having arrived at that finding I do not believe that there are grounds to accept the respondent's alternative submission relating to apportionment of expenditure, other than for interest expense. No argument was put to me that indicated that any particular item of the expenditure, other than interest, had a private or domestic element. The respondent submitted that, given a significant part of the purchase price could be related to the house on the property in which Mr Daff had an intention to and subsequently commenced to live, an appropriate part of the interest paid on the bank loan should be regarded as being of a private or domestic nature. Mr Powrie proposed that any such apportionment should be on the basis of 2 acres out of 52 acres. The respondent believed that an apportionment on the basis of area was unrealistic and that a more appropriate basis would be an apportionment based on the house value of $50,000 of a total cost of the property of $140,000.
16. Prior to dealing with that issue it is necessary to return to the question of ownership of the property and the relationship of Mr Daff and the registered owner. At the conclusion of the hearing the applicant was given leave to provide written submissions on this point, given the lateness of the respondent's advice of this being an issue. A written submission for the applicant and a reply on behalf of the respondent were filed with the Tribunal. Mr Powrie advised that, notwithstanding the extra time allowed for submissions on this question, it had not been possible to provide evidence which would make the applicant's case unassailable. It was submitted that the clear practical position and the substance of the relationship was that Mr Daff carried on a business on the subject land in his own right. As a consequence, it was argued that there were two options available for the Tribunal. One was that Mr Daff was entitled to the use of the land as a tenant of the trust. The second option was
ATC 2136that the land was held on resulting or constructive trust for Mr Daff. Attached to the written submissions were a copy of a deed of trust dated 22 May 1991 between a Mr Leslie David Daff, as settlor, and Ms McIntyre, as trustee, a deed of amendment dated 19 September 1991, a minute signed by Ms McIntyre dated 22 September 1991 authorising Mr Daff to occupy the land and conduct a business thereon, and a statutory declaration by Ms McIntyre. It was said that the purchase money was all provided by the applicant, the registered owner was not a spouse, de facto or otherwise, and the applicant was liable to repay the borrowed money used to partly finance the purchase of the land. It was submitted that the evidence did not permit a finding that a presumption of advance to the trust exists.
17. For the respondent it was submitted that all of the evidence clearly showed that the owner of the land was Ms McIntyre as trustee of the Daff Family Trust. It was said that the action of Mr Daff should be taken as acting on behalf of the trust in the absence of lease documents, payment of rent, details of any loan account, trust documentation or books. It was further argued that the absence of evidence from Ms McIntyre should be seen as a position where her evidence would not have assisted Mr Daff. The respondent objected to the attachments to the applicant's submission being taken into evidence, particularly the minute and statutory declaration of Ms McIntyre. The reasons for the objection were that the time for introducing new evidence had passed, Ms McIntyre had not been called to give evidence under oath and the respondent had no opportunity to cross-examine Ms McIntyre. The respondent noted an apparent difference between signatures on the various documents and, whilst not suggesting that the signature on the minute was a forgery, suggested that the differences could be explicable by the minute having been brought into existence some years later than the date appearing on the document. It was pointed out also by the respondent that statements made in the statutory declaration were incompatible with the purported resolutions in the minute. Finally, the respondent submitted that there was no evidence and no case made out to support the existence of a resulting or constructive trust for Mr Daff.
18. I do not accept the proposition put by Mr Powrie that the land was the property of Mr Daff held on resulting or constructive trust by Ms McIntyre. The land was registered in her name as trustee of the Daff Family Trust, the letter from Mr Daff's accountant to the bank in May 1991 referred to the purchaser as the Daff Family Trust, and Mr Daff was quite clear in his evidence that, on advice, the property was purchased for the trust and for the ultimate benefit of his children. Not only was the presumption of advancement not rebutted by the evidence, it was positively reinforced. He stated that Ms McIntyre was trustee of the trust and aware of the ownership in her name in that capacity. For the reasons advanced by the respondent, the statutory declaration and minute signed by Ms McIntyre and produced after the hearing have negligible weight. In any event, the statutory declaration which states that she did not fully understand the implications or responsibilities of holding the property as a trustee, that she did not believe that anyone apart from Mr Daff was to be the owner of the property or to benefit from it and it was for his sole use, conflicts with both the sworn oral evidence of Mr Daff and the purported minute. The minute purports to give Mr Daff rent-free use of the land, subject to paying all outgoing costs, including mortgage payments and any other outgoings related to the property, or a rental of $200 per week or some other sum when ``either the business or primary production activities become profitable''.
19. While I accept that the purchase price of the property was provided by Mr Daff from his own funds and from a bank loan in his name, I am in no doubt that it was his express intention that the property be owned by Ms McIntyre in her capacity as trustee of the Daff Family Trust and to be held by her for the benefit of the beneficiaries of that trust. The only evidence of the loan being in the name of Mr Daff was a copy of a bank statement for the period 4 February to 28 July 1994, showing the name of the account as ``Mr Wayne Colin Daff - Housing Loan Account'', a closing balance of $83,131.56 OD, regular deposits and monthly interest charges. What terms of security cover this loan account and who the bank believes is the owner of the property are unknown. I find that the subject land during the relevant years was owned by the trust.
20. However, I am not prepared to accept the respondent's submission that the actions of Mr Daff should be regarded as being taken as being on behalf of the trust, and that he was not carrying on the primary production business on his own account. On the contrary, I am satisfied that the intention of Mr Daff was to separate ownership of the land and the carrying on of the business. It has not been uncommon advice and practice to seek to ensure that a major capital asset, such as land, is held in trust for the benefit of the family with the individual carrying on and carrying the risk of a business venture on that land. Given the nature of the relationship, the limited understanding of the parties of the legal position and the substance of Mr Daff's evidence, it is not surprising that no formal lease document was produced. I find that Mr Daff was carrying on his own business of primary production on land owned by the family trust.
21. This leaves the question of deduction for interest. The interest claimed is assumed to be interest on the bank loan taken out to acquire the property. No evidence was led as to whether interest or expenditure in the nature of interest in relation to any other loan was included in the claim, and I was given no reason to believe that interest expense claim related to any other loan. Based on my earlier findings, it is clear that the purpose of the loan was for the purchase of the land by the family trust. If the loan was taken out by Mr Daff personally, then such loan was for the purpose of advancing the funds to the trust, either by way of gift or loan, to enable the trustee to purchase the land. If it was by way of loan, there is no evidence or indication that interest was payable by the trustee and, indeed, it is difficult to see how the trustee could pay interest unless there was income available to the trustee from other pursuits. In any event, the interest expense by Mr Daff was not incurred in gaining or producing his assessable income, nor necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Further, it was expenditure of a private or domestic nature incurred by Mr Daff to enable the family trust to acquire an asset to be held for the benefit of his family and, possibly, to provide a residence for himself. I am not satisfied that there is any evidence to show that the interest expense was a necessary cost of Mr Daff's occupation of the property and the carrying on of his business of primary production. Rather than consider any apportionment, I find that no part of the interest expense was an allowable deduction in the relevant years.
22. Although the objection lodged by the applicant included a ground that additional tax for understatement of income should be remitted, no argument on this question was put during the hearing. I have no knowledge of the rate of additional tax levied in the assessments, and no reason to believe that it was excessive, other than to the extent it was imposed on deductions incorrectly disallowed.
23. It follows from the foregoing that the decisions under review should be varied and the matter remitted to the respondent with a direction that amended assessments be issued for the years in question to allow a deduction for losses claimed from the business of primary production other than amounts claimed as interest expense.