Case R1

Judges:
MB Hogan Ch
P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 22 December 1983.

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M.B. Hogan (Chairman)

Unfortunately in this reference where the facts are very simple and very clear, I find myself reaching a different conclusion from my colleagues. I take the view that, in the year of income under reference, the taxpayer was carrying on a business of primary production.

2. The taxpayer, before taking up his appointment as an A-grade mechanic with a scientific research station in a small country town, broadly in the Burnett area, had for a number of years been associated with a lettuce-growing venture near Brisbane. He lived at that time at Toowoomba. At the time of the hearing of this reference, he had lived in accommodation provided at the research station for something over seven years. He still resided at the research station where, as he described it, he ``look(ed) after all the machinery from chainsaws to bulldozers'' and did ``a lot of modification of things for scientific work for research''. Ever since he had moved to the area, he and his wife had ``looked for something of our own'' in the area which they both liked.

3. In October 1979, they paid a holding deposit on a 16 hectare property, off the main road and about an hour and one-half's drive in an easterly direction from the town at which the taxpayer was stationed. There was a house, telephone, electricity windmill and a few associated sheds on the property. The house had at one time been a small country hotel, but, at the time of payment of the holding deposit, it was occupied by a widow with children living with her. As finalisation of the purchase of the property was dependent upon the sale of the taxpayer's house in Toowoomba, the taxpayer rented the property from the widow from October 1979 until February 1980 when the sale of his own house in Toowoomba allowed him to complete the sale. Effectively, the taxpayer and his wife owned the property from February 1980, though they had access to the property for some four months prior to that date.

4. For completeness, I should add that the evidence indicates that the property has no surface water. A sandy creek in the area holds a ``bore'' from which the taxpayer can pump water with the aid of the windmill though that fails when the water table falls. A plan to construct a weir had to be abandoned because ``a lot of sand moves through the creek area''. The property has not a ``good permanent water supply''.

5. At the time of the taxpayer first getting access to the property in October 1979, he became acquainted through his parents with an officer of the Department of Primary Industries who pressed on him the desirability of introducing leucaena and brought to his attention the possibility of growing leucaena for seed as, in the view of the officer, ``the seed was going to be worth money in the future''. By the time the taxpayer had acquired the property in February 1980, he had marked out an area of two hectares for the cultivation of leucaena; by this time he had settled on the aim of growing leucaena seed for other people being of the view that ``in time to come, they will be planting it for improved pastures''. A leaflet on Growing and Grazing Leucaena prepared by the agrostologist on whom the taxpayer relied for advice has the following information re sowing times for seed:

``Sowing times. Low soil temperatures delay emergence. On the other hand, if sowing is left until summer, weed control can be a problem and the leucaena will not be well enough established for grazing in the first winter. As well, frost can severely damage or even kill small plants. It is recommended that sowing be done after the first suitable rain from mid-September onwards. Seed should be sown into moist soil at a depth of 4 to 5 cm.''

Accordingly, the taxpayer's first trial plantings of about a dozen plants were made in August 1980. Since that time, two further areas of half a hectare each have been planted in successive years. The taxpayer also had necessary soil tests taken. At the time of the hearing, the taxpayer had no intention of going beyond about two hectares of planting because experience indicates that is the limit of what he will be able to service ``unless things went well and you can mechanise yourself up''. His future intention was stated to be to bring in cattle at a later date and let them graze on the property including the area where leucaena is grown. Experiments indicate that cattle can graze on leucaena for three consecutive days a week over a three-month period for several years without visual signs of hair loss and other side-effects.

6. The taxpayer's plantings of leucaena have not enjoyed success. In the first year, he was plagued by security problems, there being a series of breaking and entering occurrences. This resulted in much of his available time at the

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property, week-ends mainly, being directed to security in relation to the house, sheds and equipment. In the second year, there was a severe drought, resulting in only about 10 per cent of his total plantings surviving. In the result, his long-term plans as outlined in the previous paragraph have been delayed. His ultimate plan of leaving the experimental station and living on the property as a small crop-farmer running a few head of cattle, at the same time as he conducts business as a mechanic-fitter based on a mobile workshop, is very much in the future.

7. I must record that I view the taxpayer as a witness of truth who gave a full and frank account of the venture on which he had entered. I accept that it is his intention to develop the property along the lines that he outlined to the Board with a long-term view to living in the house on the property whilst conducting therefrom a business of a mechanic-fitter in the local area. It is against this background and that of the facts recorded in the preceding paragraphs that I am called upon to determine whether the taxpayer was engaged in primary production in the year ended 30 June 1980.

8. The case seems to me to present some parallels with that of Commander Ferguson (
Ferguson v. F.C. of T. 79 ATC 4261 ). In the joint decision of Bowen C.J. and Franki J. in that case, their Honours canvassed a range of cases against which to settle criteria for consideration of whether the appellant was carrying on business, vide the following extract from pp. 4264-4265:

``It is necessary to turn to the cases. 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. See generally,
Trautwein v. F.C. of T. (No. 2) (1936) 56 C.L.R. 196 ;
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186 ;
Fairway Estates Pty. Ltd. v. F.C. of T. 70 ATC 4061 ; (1970) 123 C.L.R. 153 ;
Thomas v. F.C. of T. 72 ATC 4094 ; (1972) 46 A.L.J.R. 397 especially at pp. 4098-4100; 399-401 , in all of which cases it was held the taxpayer was carrying on business; and
Martin v. F.C. of T. (1953) 90 C.L.R. 470 in which it was held the taxpayer was not carrying on business.''

Their Honours' conclusion at p. 4266, in terms redolent of the approach adopted by Webb J. in Martin v. F.C. of T. (1952) 10 A.T.D. 37; (1952) 90 C.L.R. 470, was to the effect that:

``The question is what is the proper conclusion, having regard to what he did. In our opinion, the proper conclusion is that his activities in advance of carrying out his ultimate intention were such as to constitute a business.''

Fisher J. in his decision at pp. 4268-4269, approached the question by way of Martin's case (supra) and went on to observe in relation to the findings of the trial Judge at p. 4269:

``But it seems to me necessary to give more detailed consideration to the activities of the taxpayer at the first stage. The fact that he ultimately intended to carry on the business of cattle raising or primary production on his own property with the stock acquired during the first stage does not necessarily preclude the finding that the taxpayer was also carrying on business during the first stage. 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

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more limited activities at the earlier stage, standing alone, constitute a business.''

Fisher J. then went on to consider certain remarks of Menzies J. in
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 11 A.T.D. 510 at p. 519; (1959) 101 C.L.R. 30 at p. 48 which emphasised that an outgoing may be an allowable deduction even though it is incurred in a year when no assessable income is produced and the views of Walsh J. in Thomas v. F.C. of T. 72 ATC 4094 that a taxpayer may carry on business albeit in a very small way. Finally he came to the conclusion that, even though the operations carried on in Ferguson (supra) were activities preparatory to commencing a business, they had sufficient commercial flavour and were conducted systematically and in a sufficiently business-like way to be classified in their own right as activities of a business.

9. Here the activities of the taxpayer have at all times been carried on on the property which he has deposed, and which I have accepted, was to be the long-term site of his business activities. In the year of income under reference, those activities were on a minuscule scale but the explanation for that lies in the problems posed by the selected crop, the preferred sowing season and the lateness in the year of income of the taxpayer's final acquisition of the property. It would, in the circumstances, be totally unacceptable to determine the taxpayer's claims on the basis of activities within the year of income under review; it has to be determined in the light of the overall circumstances in relation to which relevant material is before the Board. I have no doubt, on that material, that, by the time the taxpayer had acquired ownership of the property, he had in mind a programme for growing leucaena on the property, a programme which, on the evidence, was intended to produce a small but significant income for the taxpayer. After the trial planting of the 1980 spring, the taxpayer has sown a further two half-hectares, one in each of the planting seasons for 1981 and 1982. It appears to me that the taxpayer had entered from the beginning on a course of conduct that involved building up an area under cultivation to produce leucaena seed. It was an activity with a commercial purpose and has been conducted with as much system as the taxpayer's circumstances would allow. To paraphrase the words of Fisher J. in Ferguson - there was nothing haphazard or disorganised in the way the taxpayer has carried out the activity - even the Commissioner's representative was inclined to accept that the taxpayer may well have been a primary producer in a later year. The results have been unsatisfactory but they have been due to the prolonged drought of 1982 and the earlier problems with security, which divided the taxpayer's efforts. It is well to recall that, in Thomas (supra), there was evidence that income had not been earned by the year ended 30 June 1970 from trees planted some five years earlier. There had been a series of natural disasters which had depleted the initial plantings. Despite this, Walsh J. was prepared to base his finding that the taxpayer was engaged in a business of primary production upon the expectation on reasonable grounds that the produce would have a ready market and would yield a financial return ``which would be a significant amount, with relatively small outlay of time and money'', a yield which could be expected to continue for a very long time (at ATC pp. 4099-4100). His Honour was not deterred from this finding by a degree of ineptness on the part of the taxpayer, observing merely that ``many persons carry on a business for the competent conduct of which they have not previously acquired much knowledge and experience''. His Honour did however attach importance to the fact that the taxpayer did take advice. There are marked similarities with the facts of Thomas in this reference. Finally, it is clear from the evidence that this is not a case of pursuit of a hobby or recreation. Nor is there anything in the evidence to suggest that the property was bought with a purpose of early retirement from the taxpayer's present position. In summary, it appears to me that the taxpayer, by the time he had acquired the property in February 1980, had formed the plan of utilising a suitable part of it for the growing of leucaena for seed, that he pursued that aim to the best of his ability based on appropriate expert advice, following the planting and development plans proposed by the expert advice and that that project held the prospect of significant financial returns relevant to the time and energy expended. I accept that, in the year ended 30 June 1980, the taxpayer was carrying on business as a primary producer and would reduce the assessment to allow a further deduction of $137.

10. Dr. Gerber has relied in part on the decision of Barwick C.J. in
Southern Estates Pty. Ltd. v. F.C. of T. (1967) 14 A.T.D. 543 ; (1967) 117 C.L.R. 481 .

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That case was a case under sec. 75(1) in which the problem for the Court was whether expenditure on clearing and improving virgin land by a taxpayer whose business was the buying and selling of land, was allowable as a deduction on the basis that those processes of themselves would support a conclusion that the taxpayer was ``engaged in primary production''. The decision determines only the limited question of the ambit of sec. 75(1); it is to be recalled that the taxpayer sold the land in the year of income, and, in determining the loss on resale of the land, had already taken the expenditure into account. Certain dicta of Barwick C.J. at A.T.D. pp. 545-546; C.L.R. pp. 488-489 make it appear as if the taxpayer could never have been classified in terms of sec. 75(1) as being engaged in primary production ``for the reason that the expenditures which it claims to deduct were not expenditures made by a person intending to engage in primary production in a relevant sense''. The decision was never intended to set parameters for determining whether a taxpayer should be regarded as carrying on a business of primary production. The difference between my colleagues and me, arises from the fact that I do not consider myself in determining this question to be limited to the facts of the year of income ended on 30 June 1980 alone; the whole of the admissible evidence has to be taken into account and that involves resort to the facts of later years of income.