DW Muller SM

Administrative Appeals Tribunal


Decision date: 5 February 2001

DW Muller (Senior Member)

This is an application by Cecil Crees to review decisions of the respondent to disallow objections to amended assessments for the three income tax years ending 30 June 1995, 1996 and 1997.

2. Mr. Crees has been growing orchids since 1984. He first claimed to be in the business of growing orchids in the 1989 taxation year. The questions for determination by the Tribunal are:

3. The following facts are not in dispute and the Tribunal finds as follows:

| Tax year | Salary/ | Sales of orchids | Expenses re: | Losses   | Cost of  |
| ended    | wages   | & day-lillies    | orchids and  | from     | breeding |
| 30 June  | Income  |                  | day-lillies  | orchids  | stock    |
|          |         |                  |              | and day- |          |
|          |         |                  |              | lillies  |          |
| 1991     |         | $ 632            | $ 7,874      | $ 7,242  |          |
| 1992     |         | $ 661            | $ 8,940      | $ 8,279  |          |
| 1993     |         | $1,465           | $ 9,524      | $ 8,059  |          |
| 1994     | $37,135 | $1,729           | $12,205      | $10,476  | $5,176   |
| 1995     | $46,119 | $1,350           | $13,689      | $12,339  | $3,341   |
| 1996     | $41,569 | $1,485           | $14,145      | $12,660  | $5,170   |
| 1997     |         | $3,302           | $13,113      | $ 9,811  | $2,117   |
| 1998     |         | $6,035           | $10,809      | $ 4,774  |          |
| 1999     |         | $4,000 (approx)  |              |          |          |
| 2000     |         | $5,500 (approx)  |              |          |          |

4. Mr. Crees gave evidence to the Tribunal that he began to get the idea of turning his hobby of growing orchids into a business in the late 1980s. He said that his work with Telstra (Telecom as it then was) was both demanding and insecure because of the rapid changes in technology. He intended to back up his retirement package/superannuation with income from selling orchids. He said that he had hoped to be running the business at a profit by the year 2000. He is doubtful whether he could ever make a profit of more than $5,000 per annum from the business.

5. The auditor, Tony Yates, gave evidence that when he visited the property in 1997, the whole operation appeared to him to be poorly run. He could detect no planning or organisation done with a view to direct the activity towards making a profit. He described the hot house as being in a ``shambles''.

6. Mr. Crees told the Tribunal that he and his wife put in about 30 hours per week between them on the orchids and day-lillies. His wife puts in about 10 hours during the week. He puts in about 20 hours per week, including about 16 hours every weekend.

7. From the material placed before the Tribunal, the following deductions can be made:

8. The question as to whether or not an activity amounts to a business of primary production is a fact to be determined by the evidence in each individual case. The taxpayer's subjective view that he has been running a business has to be taken into account, but the question should ultimately be decided by an objective test. Some guidance as to the objective tests to be applied have been provided from time to time by the Courts, Boards of Review and Tribunals. The cases regularly cited in this area of the law are
Thomas v FC of T 72 ATC 4094 and Case K9,
78 ATC 98. In Thomas, Walsh J, at 4099-4100 said:

``... There is no doubt that the appellant's chief occupation was the practising of his profession and that the tree farming, if it had a business character, was relatively of minor importance both as to the time devoted to it and as to the returns to be expected from it. But a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the

ATC 2024

growing of which did not have, I think, a significant commercial purpose or character. But the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money and that this return would continue for a very long time. In these circumstances I think it is proper to find, and I do find, that he set out to engage in producing the pears and the nuts as a business and that he was in the tax year carrying on that business, which was a business of primary production.''

I also note the remarks of Fairleigh Q.C. (Board of Review Member) in Case K9, where he said:

At 102:

``The `purpose' as shown by Thomas has to be to carry on activities which have a significant commercial character.''

At 103-104:

``... the conduct of a venture in a businesslike way is not decisive of the question in issue, though it is important.


... The fact that a property will be incapable of ever providing fair monetary returns for the orchardist, dairy farmer, grazier, oyster- bed lessee, etc., who conducts it as a full- time or part-time occupation is but one of many factors for consideration (cf. the financial position of the coffee shop proprietor in
The Commonwealth v Reeve (1949) 78 C.L.R. 410). If the activities carried on have the indicia of a business (e.g., a significant commercial purpose or character) it is of little consequence that despite continuance for many years a profit has not been shown and none is presently envisaged.''

9. I find that in the case of Mr. Crees and his wife:

10. It would be a most unusual business operator who would expend large amounts of money and labour, for more than ten years, on a business which was unlikely to ever cover the expenditure and even if it did, was not likely to give a reasonable return for effort. Under the circumstances I find that the orchid growing enterprise of Mr. Crees does not have a significant commercial character and that, therefore, it does not amount to a business of primary production.

11. As far as the additional amounts for penalty and interest are concerned, I find that, at the very least, it was very ambitious of Mr. Crees to attempt to claim that his operation was a business and not merely a hobby. The penalties should remain.

12. The decisions which disallowed objections to amended assessments for the income tax years ending 30 June 1995, 1996 and 1997, are affirmed.


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