Case Q64

Judges: MB Hogan Ch
P Gerber M

GW Beck M

Court:
No. 3 Board of Review

Judgment date: 15 July 1983.

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Dr. G.W. Beck (Member)

This taxpayer claimed a deduction for a half share in losses incurred by a partnership between him and his wife in 1979 and 1980 tax years. Partnership returns were lodged for those years on the basis that a business of primary production was carried on, and the Commissioner has refused to allow the losses shown in these returns on grounds that the taxpayer and his wife were not carrying on business.

2. The taxpayer was a pharmacist in the Commonwealth public service in Canberra when he and his wife visited the Sunshine Coast of Queensland in July 1978. They were much taken by the region and, as the taxpayer had grown up in a fruit growing district, he ``thought it might be an idea if we got a small property to grow some fruit on, to act as a supplement to a very small retiring pension''. They bought 3 ½ acres ``covered with dense sub-tropical growth and scrub wattles'' but the contract was completed only after they had returned to Canberra. They returned at the time of the husband's next annual leave and, according to the taxpayer, ``in possibly May'' 1979 he did a great deal of clearing and fencing and planted the following which were acquired a the cost shown:

                                  $

      2 Coffee                    3

      2 Mulberry                  4

      2 Quinces                   4

      1 Bananapassionfruit        2

      1 Jamacian water lemon      2

      1 Olive                     3

      1 Loquat                    3

      1 Red currant               2

      1 Black currant             2

      2 Raspberries               3

      1 Bay tree                  3

      1 Rambutan                 13

      1 Jack fruit               10

      1 Mangosteen               15

      1 Lime                     15

                                ---

      c/forward





        

                84



                                  $

      b/forward                  84

                                ---

      1 Lychee                    5

      1 Guava                     4

      1 Mango                     3

                                ---

      Horseradish                 1

      Asparagus                   5

      Rhubarb                     1

      Artichokes                  5

      Strawberries                2

                               ----

                               $100

                               ----
      

• (This list, with prices, has been extracted from the partnership return. The total cost should, in fact, be $110.)

This list was included in the 1979 partnership tax return under a heading ``advanced trees purchased (expected to become income producing in 2 years time)''. That expectation had to be more than optimistic for many of the trees, even if the Sunshine Coast had treated them to its most favourable weather. In fact, there was a deficiency of rain during the next two years when the taxpayer and his wife were again in Canberra, and only four trees and the asparagus survived. By the time the 1980 partnership return was lodged a further 21 fruit trees had been planted and expectations had modified. It was said: ``It is estimated that the first yields will be harvested in 1986.''

3. The partners continued to attend their property only during the annual leave of the taxpayer until January 1983 when the taxpayer retired from his Canberra employment. At the hearing he explained in detail his intentions at the time of buying the land and the enquiries that were made then and afterwards of local farmers, of government horticultural advisers and of people from the fruit and vegetable markets. The taxpayer was thoroughly credible and I accept without reservation that he and his wife set out to cultivate a small area which would eventually contain numerous varieties of rather rare and sometimes exotic fruit and nut trees and they expected to sell the produce thereby deriving assessable income. The venture is continuing and they are working at it full time now. On the evidence it seems clear that at some point in time the partnership became or will become engaged in a business of primary production. The question that needs to be determined here is whether that point falls before 30 June 1980 which was the closing date of the second year under consideration.

4. There is also no doubt that the taxpayer worked very hard during the visits from Canberra, but it has to be said that during those times he did no more than clear the overgrown land, build fences and plant some trees. During the year a neighbour slashed the land to keep excessive growth down and the taxpayer described this as a ``neighbourly act''. It might, in fact, have been to stop groundsel and similar pests flowering and seeding or to give the neighbour some protection against fire but, even if it were more than that, the slashing cannot really be regarded as part of the working of the property.

5. The expression ``in carrying on'' in the second limb of sec. 51(1) conveys a requirement that claimed expenditure ``must be part of the cost of trading operations'' ( Menzies J. in
John Fairfax & Sons Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 at p. 49 ). It is difficult to see that the taxpayer and his wife ever got as far as carrying out day-to-day business or trading operations in 1979 and 1980.

6. Although business can be carried on part-time and in a small way (
Thomas v. F.C. of T. 72 ATC 4094 and
Hope v. Council of City of Bathurst 80 ATC 4386 ) it is the nature and extent of the activity and not the state of mind or intention of the taxpayer that determines whether a business is being carried on (
Inglis v. F.C. of T. 80 ATC 4001 ). I have concluded that clearing and planting trees - 22 in the first year and 21 in the second - and then going away and leaving them to their own devices does not classify as carrying on a primary production business. At best, it can be regarded as no more than getting ready to carry on business.

7. I confirm the assessments in both years.

Claims disallowed